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Controladora Vuela Cia De Aviacion (VLRS)

Filed: 26 Apr 22, 7:40pm

Table of Contents

As filed with the Securities and Exchange Commission on April 26, 2022

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F

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

OR

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

For the fiscal year ended December 31, 2021

OR

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

OR

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

Date of event requiring this shell company report

For the transition period from                   to            

Commission file number 001-36059

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

(Exact name of Registrant as specified in its charter)

Volaris Aviation Holding Company

(Translation of Registrant’s name into English)

United Mexican States

(Jurisdiction of incorporation or organization)

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

Colonia Zedec Santa Fe

United Mexican States, Mexico City, 01210

(Address of principal executive offices)

Renato Duarte Salomone (ir@volaris.com)
Av. Antonio Dovalí Jaime No. 70, 13 Floor, Tower B, Colonia Zedec Santa Fe United Mexican States, Mexico City, 01210

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

Title of each class

    

Trading Symbol(s)

    

Name of each exchange on which registered

American Depositary Shares (ADSs)

VLRS

New York Stock Exchange

Ordinary Participation Certificates (Certificados de
Participación Ordinarios or CPOs)

VLRS

New York Stock Exchange

Series A shares of common stock, no par value

VOLARA

Mexican Stock Exchange

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None

(Title of Class)

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

None

(Title of Class)

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

Ordinary Participation Certificates (Certificados de Participación Ordinarios):

964,200,367

Series A shares of common stock, no par value per share:

1,108,462,804

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

  Yes      No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

  Yes      No

Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

  Yes      No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

  Yes      No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  

Accelerated filer  

Non-accelerated filer  

Emerging growth company  

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.   ☐

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP  

International Financial Reporting Standards as issued
by the International Accounting Standards Board 

Other  

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

  Item 17      Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

   Yes     No

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

   Yes     No

TABLE OF CONTENTS

Page

FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS

1

INTRODUCTION AND USE OF CERTAIN TERMS

3

SUMMARY OF RISK FACTORS

4

GLOSSARY OF AIRLINES AND AIRLINE TERMS

6

PRESENTATION OF FINANCIAL INFORMATION AND OTHER INFORMATION

9

PART I.

10

ITEM 1 IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

10

ITEM 2 OFFER STATISTICS AND EXPECTED TIMETABLE

10

ITEM 3 KEY INFORMATION

10

ITEM 4 INFORMATION ON THE COMPANY

41

ITEM 4A UNRESOLVED STAFF COMMENTS

68

ITEM 5 OPERATING AND FINANCIAL REVIEW AND PROSPECTS

68

ITEM 6 DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

98

ITEM 7 MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

108

ITEM 8 FINANCIAL INFORMATION

111

ITEM 9 THE OFFER AND LISTING

112

ITEM 10 ADDITIONAL INFORMATION

120

ITEM 11 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

137

ITEM 12 DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

140

PART II.

146

ITEM 13 DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

146

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

146

ITEM 15 CONTROLS AND PROCEDURES

146

ITEM 16 [Reserved]

147

ITEM 16A Audit Committee Financial Expert

147

ITEM 16B Code of Ethics

147

ITEM 16C Principal Accountant Fees and Services

148

ITEM 16D Exemptions from the Listing Standards for Audit Committees

148

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

148

ITEM 16F Change in Registrant’s Certifying Accountant

148

ITEM 16G Corporate Governance

148

ITEM 16H MINE SAFETY DISCLOSURE

152

PART III.

152

ITEM 17 FINANCIAL STATEMENTS

152

ITEM 18 FINANCIAL STATEMENTS

153

ITEM 19 EXHIBITS

153

EXHIBIT INDEX

154

i

FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS

This annual report on Form 20-F or our “annual report,” contains various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which represent the Company’s expectations, beliefs or projections concerning future events and financial trends affecting the financial condition of our business. When used in this annual report, the words “expects,” “intends,” “estimates,” “predicts,” “plans,” “anticipates,” “indicates,” “believes,” “forecast,” “guidance,” “potential,” “outlook,” “may,” “continue,” “will,” “should,” “seeks,” “targets” and similar expressions are intended to identify forward-looking statements. Similarly, statements that describe the Company’s objectives, plans or goals, or actions the Company may take in the future, are forward-looking statements. Forward-looking statements include, without limitation, statements regarding the Company’s intentions and expectations regarding the delivery schedule of aircraft on order, announced new service routes and customer savings programs. Forward-looking statements should not be read as a guarantee or assurance of future performance or results and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made and/or management’s good faith belief as of that time with respect to future events and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Forward-looking statements are subject to a number of factors that could cause the Company’s actual results to differ materially from the Company’s expectations, including the competitive environment in the airline industry; the Company’s ability to keep costs low; changes in fuel costs; the impact of worldwide economic conditions on customer travel behavior; the Company’s ability to generate non-passenger revenues; and government regulation. Additional information concerning these, and other factors is contained in the Company’s Securities and Exchange Commission filings. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth above. Forward-looking statements speak only as of the date of this annual report. You should not put undue reliance on any forward-looking statements. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information, except to the extent required by applicable law. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements. Important factors that could cause such differences include, but are not limited to:

the competitive environment in our industry;
ability to keep costs low;
changes in our fuel cost, the effectiveness of our fuel cost hedges and our ability to hedge fuel costs;
the impact of worldwide economic conditions, including the impact of the economic recession on customer travel behavior;
actual or threatened terrorist attacks, global instability, geopolitical risks and potential U.S. military actions or activities;
ability to generate non-passenger revenues;
external conditions, including air traffic congestion, weather conditions and outbreak of disease and pandemics;
ability to maintain slots in the airports that we operate and service provided by airport operators;
ability to operate through new airports that match our operative criteria;
air travel substitutes;
labor disputes, employee strikes and other labor-related disruptions, including in connection with our negotiations with our union;
ability to attract and retain qualified personnel;
loss of key personnel;

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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, changes in law and interpretation and supervision of compliance with applicable law;
maintaining and renewing our permits and concessions;
our ability to execute our growth strategy;
operational disruptions;
our indebtedness;
currency fluctuations or the devaluation and depreciation of the peso;
our liquidity;
our reliance on third-party vendors and partners;
our reliance on a single fuel provider in Mexico;
an aircraft accident or incident;
our aircraft and engine suppliers;
changes in the Mexican and VFR (passengers who are visiting friends and relatives) markets;
insurance costs;
environmental regulations;
cyber-attacks;
our ability to respond to global health crises, such as the ongoing COVID-19 pandemic; and
other risk factors included under “Risk Factors” in this annual report.

In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this annual report may not occur and actual results could differ materially from those anticipated or implied in the forward-looking statements.

All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth above. Forward-looking statements speak only as of the date of this annual report. You should not put undue reliance on any forward-looking statements. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information, except to the extent required by applicable law. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.

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INTRODUCTION AND USE OF CERTAIN TERMS

In this annual report, we use the term “Volaris” to refer to Controladora Vuela Compañía de Aviación, S.A.B. de C.V., “Volaris Opco” to refer to Concesionaria Vuela Compañía de Aviación, S.A.P.I. de C.V., “Comercializadora” to refer to Comercializadora Volaris, S.A. de C.V., “Servicios Corporativos” to refer to Servicios Corporativos Volaris, S.A. de C.V., “Servicios Administrativos” to refer to Servicios Administrativos Volaris, S.A. de C.V., “Servicios Earhart” to refer to Servicios Earhart, S.A., “Vuela” to refer to Vuela, S.A. and “Vuela Aviación” to refer to Vuela Aviación, S.A., “Viajes Vuela” to refer to Viajes Vuela, S.A. de C.V., “Comercializadora Frecuenta” to refer to Comercializadora V. Frecuenta, S.A. de C.V., “Vuela El Salvador” to refer to Vuela El Salvador, S.A. de C.V., and “GDS” to refer to Guatemala Dispatch Service, S.A.Volaris Opco, Comercializadora, Servicios Corporativos, Servicios Administrativos, Vuela, Vuela Aviación, Viajes Vuela, Comercializadora Frecuenta and Vuela El Salvador are wholly-owned subsidiaries of Volaris. The terms “we,” “our” and “us” in this annual report refer to Volaris, together with its subsidiaries, and to properties and assets that they own or operate, unless otherwise specified. References to “Series A shares” refer to Series A shares of Volaris.

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SUMMARY OF RISK FACTORS

An investment in our securities and ADSs is subject to a number of risks, including risks related to Mexico, risks related to the airline industry, risks related to our business, and risks related to our securities and the ADSs. The following list summarizes some, but not all, of these risks. Please read the information in the section entitled “Risk Factors” for a more thorough description of these and other risks.

Risks related to Mexico

Political events and changes in Mexican government policy: 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.
Adverse economic conditions in Mexico: 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.
Developments in other countries: Developments in other countries, including the immigration and trade policies imposed by former U.S. President Donald Trump, adversely impacted our financial condition and results of operations. While it is expected that the current administration will reverse these policies, other developments, particularly related to international COVID-19 response measures, may result in lower demand for our flights.
Currency fluctuations: 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. If the peso declines in value against the U.S. dollar our demand would be adversely affected. Please see Item 3: -“ Currency fluctuations or the devaluation and depreciation of the peso could adversely affect our business, results of operations, financial condition, and prospects”.
Downgrade of IASA rating: The FAA periodically audits the aviation regulatory authorities of other countries and gives an International Aviation Safety Assessment, or IASA, rating to each country. In May 2021, Mexico´s IASA rating was downgraded from Category 1 to Category 2. The AFAC is currently working to address the FAA findings. Consequently, we are unable to add new aircraft, services, or routes to the United States.

Risks related to the airline industry

Competition: We operate in an extremely competitive industry and face significant competition with respect to routes, fares, services and slots in airports. In addition to other airlines, we compete with bus services on many of our routes. 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.
Economic Conditions: The airline industry is particularly sensitive to changes in economic conditions. Unfavorable economic conditions, such as the recent economic contraction triggered by the COVID-19 pandemic, 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.
Regulations: The airline industry is heavily regulated, and our financial condition and results of operations could be materially adversely affected if we fail to maintain the required U.S., Mexican, Central American and South American governmental concessions or authorizations necessary for our operations.
Fixed Costs: The airline industry is characterized by low gross profit margins, high fixed costs and revenues that generally exhibit substantially greater elasticity than costs. As a result, airlines, including us, cannot quickly reduce their costs to respond to shortfalls in expected revenue and a shortfall from expected revenue levels could have a material adverse effect on our results of operations and financial condition.

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Fuel Costs: The airline industry is heavily impacted by the price and availability of fuel. Fuel is our largest cost and 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. The global fuel markets have reacted negatively to the recent conflict between Russia and Ukraine with fuel prices surging to their highest level since 2008 amid supply concerns. Our ability to pass on any significant increases in fuel costs through fare increases is also limited by our ultra-low-cost business model.
COVID-19: Public health threats, including COVID-19 and other highly communicable diseases, have and could in the future result in suspension of domestic and international flights, changes to travel behavior and a material adverse effect on the Mexican economy and the other countries in which we operate, airline industry reputation, the price of our shares, our business, results of operations and financial condition. Additional government responses to the ongoing COVID-19 pandemic and its present and future variants remain unknown and depend on future developments, including the scope and duration of the pandemic, the effectiveness and acceptance of the COVID-19 vaccines, which are highly fluid, uncertain and cannot be predicted.

Risks related to our business

Ultra-Low-Cost Structure: Our ultra-low-cost structure is one of our primary competitive advantages and many factors could affect our ability to control our costs, some of which are not under our control. 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. We also depend on our non-passenger revenue to remain profitable, and we may not be able to maintain or increase our non-passenger revenue base. 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.
Maintenance Costs: While we currently have a young fleet, with an average age of 5.4 years as of December 31, 2021, our relatively new aircraft require less maintenance now than they will in the future and our maintenance costs will increase as our fleet ages. 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.
Dependence on Certain Airports: Our business is heavily dependent on our routes to and from the Mexico City, Tijuana, Guadalajara and Cancun airports, which make up a large portion of the balance of our routes. The Mexico City International Airport has been declared saturated and we cannot guarantee that in the future we may obtain additional slots in Mexico City. Any significant increase in competition, redundancy in demand for air transportation or disruption in service or the fuel supply at these airports, could have a material adverse impact on our business, results of operations and financial condition.
Limited suppliers: We rely on a limited number of suppliers for fuel, aircraft and engines.

Risks related to our securities and the ADSs

CPO Trust: Non-Mexican investors may not hold our Series A shares directly and must have them held in a CPO trust, which releases CPOs underlying Series A shares, at all times. If the current trust is terminated, a new trust similar to the CPO trust may not be created.
Voting Rights: Holders of the ADSs and CPOs are not entitled to vote the underlying Series A shares. As a result, holders of the ADSs and CPOs do not have any influence over the decisions made relating to our company’s business or operations, nor are they protected from the results of any such corporate action taken by our holders of Series A shares and Series B shares.

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GLOSSARY OF AIRLINES AND AIRLINE TERMS

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

“Aeroméxico”

means Aerovías de México, S.A. de C.V.

"AFAC"

means the Mexican Federal Civil Aviation Agency (Agencia Federal de Aviación Civil).

“AirAsia”

means AirAsia Berhad.

“Airbus”

means Airbus S.A.S.

“Alaska Air”

means Alaska Air Group, Inc.

“Allegiant”

means Allegiant Travel Company.

“Aeroméxico Connect”

means Aerolitoral, S.A. de C.V.

“American”

means American Airlines Group.

“Available seat miles” or “ASMs”

means the number of seats available for passengers multiplied by the number of miles the seats are flown.

“Average daily aircraft utilization”

means flight hours or block hours, as applicable, divided by number of days in the period divided by average aircraft in the period.

“Average economic fuel cost per gallon”

means total fuel expense net of hedging effect, divided by the total number of fuel gallons consumed.

“Average passenger 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.

“Avianca”

means Avianca Holdings S.A.

“Azul”

means Azul Linhas Aéreas Brasileiras S.A.

“Block hours”

means the number of hours during which the aircraft is in revenue service, measured from the time it leaves the gate until the time it arrives to the gate at destination.

“Booked passengers”

means the total number of passengers booked on all flight segments.

“CASM” or “unit costs”

means total operating expenses, net divided by ASMs.

“CASM ex fuel”

means total operating expenses, net excluding fuel expense divided by ASMs.

“CBP”

means U.S. Customs and Border Protection.

“CEO”

means current engine option.

“Copa”

means Copa Holding S.A.

“Delta”

means Delta Air Lines, Inc.

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“DHS”

means the U.S. Department of Homeland Security.

“DOT”

means the U.S. Department of Transportation.

“EPA”

means the U.S. Environmental Protection Agency.

“FAA”

means the U.S. Federal Aviation Administration.

“FCC” m

eans the U.S. Federal Communications Commission.

“Flight hours”

means the number of hours during which the aircraft is in revenue service, measured from the time it takes off until the time it lands at the destination.

“Frontier”

means Frontier Airlines, Inc.

“Gol”

means Gol 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.

“INEGI”

means the Mexican Institute of Statistics and Geography (Instituto Nacional de Estadística y Geografía),

“Interjet”

means ABC Aerolíneas, S.A. de C.V.

“JetSMART”

means JetSMART Airlines SpA.

“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, Grupo Aeroméxico, Avianca, Azul, Copa, Gol and LATAM.

“Legacy carrier”

means an airline that typically offers scheduled flights to major domestic and international routes (directly or through membership in an alliance) and serves numerous smaller cities, operates mainly through a “hub-and-spoke” network route system and has higher cost structures than low-cost carriers due to higher labor costs, flight crew and aircraft scheduling inefficiencies, concentration of operations in higher cost airports and multiple classes of services.

“Load factor”

means RPMs divided by ASMs and expressed as a percentage.

“Low-cost carrier”

means an airline that typically flies direct, point-to-point flights, often serves major markets through secondary, lower cost airports in the same regions as major population centers, provides a single class of service, thereby increasing the number of seats on each flight and avoiding the significant and incremental cost of offering premium-class services, and tends to operate fleets with only one or two aircraft families, in order to maximize the utilization of flight crews across the fleet, improve

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aircraft scheduling efficiency and flexibility and minimize inventory and aircraft maintenance costs.

“NEO”

means new engine option.

“On-time”

means flights arriving within 15 minutes of the scheduled arrival time.

“Other Latin American publicly traded airlines”

means, collectively, Avianca, Azul, Copa, Gol, Grupo Aeroméxico and LATAM.

“Passenger flight segments”

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

“RASM”

means passenger revenue divided by ASMs.

“Revenue passenger per miles” or “RPMs”

means the number of seats sold to passengers divided by the number of miles the seats are flown.

“Ryanair”

means Ryanair Holdings plc.

“SCT”

means the Mexican Infrastructure, Communications and Transportation Ministry (Secretaría de Infraestructura, 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 U.S. Transportation Security Administration.

“ULCC”

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, Frontier, and Spirit Airlines, Inc. 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, Allegiant, American, Delta, Frontier, Spirit, JetBlue, Southwest and United.

“VFR”

means passengers who are visiting friends and relatives.

“VivaAerobus”

means Aeroenlaces Nacionales, S.A. de C.V.

“Wizz”

means Wizz Air Holdings Plc.

8

PRESENTATION OF FINANCIAL INFORMATION AND OTHER INFORMATION

This annual report includes our audited consolidated financial statements at December 31, 2020 and 2021, and for each of the three years in the period ended December 31, 2021, which have been prepared in accordance with International Financial Reporting Standards, or IFRS, 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.20.5835 per U.S. $1.00, as reported by the Mexican Central Bank (Banco de México) as the rate for the payment of obligations denominated in foreign currency payable in Mexico (tipo de cambio para solventar obligaciones denominadas en moneda extranjera, pagaderas en México) in effect on December 31, 2021.

Such conversions are for the convenience of the reader and should not be construed as representations that the peso amounts actually represent such U.S. dollar amounts or could be converted into U.S. dollars at the rate indicated, or at all. Amounts presented in this annual report may not add up due to rounding.

Industry and Market Data

We obtained the industry and market data used in this annual report from research, surveys or studies conducted by third parties on our behalf, information contained in third-party publications, such as the INEGI, reports from the AFAC, reports from the Mexican Central Bank and other publicly available sources. Third-party publications generally state that they have obtained information from sources believed to be reliable, but do not guarantee the accuracy and completeness of such information. Although we believe that this data and information is reliable, we have not independently verified it. Additionally, certain market share data is based on published information available for the Mexican states. There is no comparable data available relating to the particular cities we serve. In presenting market share estimates for these cities, we have estimated the size of the market on the basis of the published information for the state in which the particular city is located. We believe this method is reasonable, but the results have not been verified by any independent source.

9

PART I.

ITEM  1    IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not Applicable.

ITEM  2    OFFER STATISTICS AND EXPECTED TIMETABLE

Not Applicable.

ITEM  3    KEY INFORMATION

A.Selected Consolidated Financial Data

SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OPERATING DATA

The following tables summarize selected financial and operating data for our business for the periods presented. You should read this selected consolidated financial data in conjunction with Item 5: “Operating and Financial Review and Prospects” and our audited consolidated financial statements, including the related notes thereto, all included elsewhere in this annual report. We prepare our consolidated financial statements in accordance with IFRS.

We derived the selected consolidated statements of operations data for the years ended December 31, 2019, 2020 and 2021 and the selected consolidated statements of financial position data as of December 31, 2020 and 2021 from our audited financial statements included in this annual report. The selected consolidated statements of operations data for the years ended December 31, 2017, 2018 and 2019 and the selected consolidated statements of financial position data as of December 31, 2017, 2018 and 2019 were

10

derived from the audited financial statements for those periods. See Item 18: “Financial Statements.” Our historical results are not necessarily indicative of the results to be expected in the future.

11

For the Years ended December 31, 

    

2017

    

2018

    

2019

    

2020

    

2021

    

2021

Adjusted(1)

Adjusted(1)

(in thousands

of U.S.

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

dollars)(2)

CONSOLIDATED STATEMENTS OF OPERATIONS DATA

    

    

    

    

    

    

Operating revenues:

Passenger revenues:

 

 

 

 

 

 

Fare revenues

17,791,317

 

18,487,858

 

23,129,991

 

12,873,174

 

25,703,144

 

1,248,726

Other passenger revenues

6,098,504

7,892,497

10,569,208

8,613,398

17,594,223

854,773

Non-passenger revenues:

Other non-passenger revenues

727,392

697,357

897,586

882,360

1,558,092

75,696

Cargo

170,973

227,438

228,836

201,881

241,202

11,718

Non-derivative financial instruments

(72,949)

(411,222)

(434,522)

(21,110)

 

24,788,186

 

27,305,150

34,752,672

 

22,159,591

 

44,662,139

 

2,169,803

Other operating income

 

(96,765)

 

(621,973)

 

(327,208)

 

(730,333)

 

(217,838)

 

(10,583)

Fuel expense, net

7,255,636

 

10,134,982

 

11,626,069

 

6,640,820

 

12,376,263

 

601,271

Landing, take-off and navigation expenses

4,002,744

 

4,573,319

 

5,108,489

 

4,090,864

 

6,020,681

 

292,500

Depreciation of right of use assets

3,437,903

 

4,043,691

 

4,702,971

 

5,048,976

 

5,462,625

 

265,389

Salaries and benefits

2,823,647

 

3,125,393

 

3,600,762

 

3,453,382

 

4,857,083

 

235,970

Sales, marketing and distribution expenses

1,691,524

 

1,501,203

 

1,447,637

 

1,840,819

 

1,961,936

 

95,316

Maintenance expenses(3)

1,418,253

 

1,497,989

 

1,488,431

 

1,167,720

 

1,952,202

 

94,843

Aircraft and engine variable lease expenses

1,429,595

 

956,010

 

961,657

 

1,845,254

 

1,686,875

 

81,953

Other operating expenses

1,034,258

 

1,059,098

 

1,112,927

 

1,157,240

 

1,336,792

 

64,944

Depreciation and amortization(4)

548,687

 

500,641

 

675,514

 

898,445

 

1,159,224

 

56,318

23,545,482

26,770,353

30,397,249

25,413,187

36,595,843

1,777,921

Operating income (loss)

1,242,704

 

534,797

 

4,355,423

 

(3,253,596)

 

8,066,296

 

391,882

Finance income

105,795

 

152,603

 

207,799

 

101,511

 

71,578

 

3,477

Finance cost

(1,515,281)

 

(1,876,312)

 

(2,269,829)

 

(3,018,484)

 

(2,831,989)

 

(137,585)

Foreign exchange gain (loss), net

683,039

 

(103,790)

 

1,440,501

 

470,594

 

(2,591,406)

 

(125,897)

Income (loss) before income tax

516,257

 

(1,292,702)

 

3,733,894

 

(5,699,975)

 

2,714,479

 

131,877

Income tax (expense) benefit

(237,586)

 

349,820

 

(1,094,831)

 

1,406,184

 

(593,928)

 

(28,855)

Net income (loss)

278,671

 

(942,882)

 

2,639,063

 

(4,293,791)

 

2,120,551

103,022

Weighted average shares outstanding Basic and diluted

1,011,876,677

1,011,876,677

1,011,876,677

1,021,560,557

1,165,976,677

1,165,976,677

12

Earnings (loss) per share Basic and diluted(5)

0.28

 

(0.93)

 

2.61

 

(4.20)

 

1.82

 

0.09

Earnings (loss) per ADS Basic and diluted(6)

2.75

 

(9.32)

 

26.08

 

(42.03)

 

18.19

 

0.88

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION DATA (as of December 31,)

Cash, cash equivalents and restricted cash

6,950,879

5,862,942

7,979,972

10,103,385

15,254,876

741,122

Accounts receivable, net

1,449,292

 

1,466,690

 

2,320,334

 

2,027,379

 

2,183,562

 

106,083

Guarantee deposits-current portion

1,352,893

790,635

600,327

1,141,956

1,625,886

78,990

Total current assets(11)

11,046,071

 

8,922,769

 

12,117,239

 

14,402,310

 

20,150,807

 

978,980

Total assets

49,952,973

56,724,683

63,295,127

68,189,113

82,016,361

3,984,568

Total current liabilities

13,555,372

 

14,083,029

 

17,324,216

 

20,965,950

 

25,760,976

 

1,251,534

Total non-current liabilities

32,572,248

39,936,501

40,441,228

44,426,978

49,809,947

2,419,897

Total liabilities

46,127,620

 

54,019,530

 

57,765,444

 

65,392,928

 

75,570,923

 

3,671,431

Capital stock

2,973,559

2,973,559

2,973,559

3,426,406

3,426,406

166,464

Total equity

3,825,353

 

2,705,153

 

5,529,683

 

2,796,185

 

6,445,438

 

313,137

CASH FLOW DATA

 

 

 

 

 

Net cash flows provided by operating activities

6,018,767

6,276,707

9,509,643

4,359,445

15,868,532

770,939

Net cash flow used in investing activities

(2,260,440)

 

(1,389,395)

 

(1,879,341)

 

(67,757)

 

(2,730,786)

 

(132,669)

Net cash flow used in financing activities

(3,634,598)

 

(5,946,059)

 

(5,238,840)

 

(3,040,840)

 

(8,828,377)

 

(428,906)

FINANCIAL DATA

 

 

 

 

 

Operating income (loss)

1,242,704

 

534,797

 

4,355,423

 

(3,253,596)

 

8,066,296

 

391,882

Depreciation of right of use assets

3,437,903

 

4,043,691

 

4,702,971

 

5,048,976

 

5,462,625

 

265,389

Depreciation and amortization

548,687

 

500,641

 

675,514

 

898,445

 

1,159,224

 

56,318

Aircraft and engine variable lease expenses

1,429,595

 

956,010

 

961,657

 

1,845,254

 

1,686,875

 

81,953

OPERATING DATA(9) (10)

Aircraft at end of period

71

77

 

82

 

86

 

101

 

Average daily aircraft utilization (block hours)

12.57

13.21

12.94

11.30

12.53

Average daily aircraft utilization (flight hours)

10.02

10.56

 

10.90

 

9.73

 

10.77

 

Average pesos/U.S. dollar exchange rate

18.93

19.24

 

19.26

 

21.50

 

20.28

 

End of period pesos/U.S. dollar exchange rate

19.74

19.68

 

18.85

 

19.95

 

20.58

 

Airports served at end of period

69

69

65

68

69

13

Departures(7)

108,060

117,920

 

138,084

 

97,819

 

153,913

 

Passenger flight segments (thousands)(7)

15,670

17,478

 

20,917

 

13,153

 

22,560

 

Booked passengers (thousands)(7)

16,427

18,396

 

21,975

 

14,712

 

24,405

 

Revenue passenger miles (RPMs) (thousands)(7)

15,917,246

17,748,408

21,032,364

14,596,745

23,802,381

Available seat miles (ASMs) (thousands)(7)

18,860,950

21,009,545

 

24,498,893

 

18,274,946

 

28,096,701

 

Load factor(8)

84

%  

85

%  

86

%  

80

%  

85

%  

Average fare revenue per booked passenger(8)

1,086

 

1,006

 

1,054

 

875

 

1,054

 

51

Average other passenger revenue per booked passenger(7)(9)

371

 

429

 

481

 

585

 

721

 

35

Total ancillary revenue per booked passenger(7)(9)

426

 

479

 

532

 

659

 

795

 

39

Total operating revenue per ASM (TRASM) (cents)(7)(9)

131.4

 

130.0

 

142.2

 

123.5

 

160.5

 

7.8

Passenger revenue per ASM (RASM) (cents)(7)(9)

94.3

 

88.0

 

94.4

 

70.4

 

91.5

 

4.4

Operating expenses per ASM (CASM) (cents)(7)(9)

124.8

 

127.4

 

124.3

 

141.3

 

130.9

 

6.4

CASM ex fuel (cents)(7)(9)

86.4

 

79.2

 

76.6

 

102.7

 

86.2

 

4.2

Fuel gallons consumed (thousands)

210,536

 

227,436

 

251,802

 

176,645

 

273,515

 

Average economic fuel cost per gallon(9)

34.5

 

44.6

 

46.4

 

39.9

 

45.9

 

2.2

Average of employees per aircraft at end of period

67

 

60

 

60

 

54

 

63

 

(1)As of January 1, 2019, we adopted IFRS 16 using the full retrospective method of adoption in order to provide comparative results in all periods presented, recognizing the effect in retained earnings as of January 1, 2017. Our financial results as of and for the years ended December 31, 2017 and 2018 were presented in our annual report for the year ended December 31, 2018 filed with the SEC on April 26, 2019 and were adjusted in our Audited Consolidated Financial Statements presented in the annual report to consider this application of IFRS 16.
(2)Peso amounts were converted to U.S. dollars solely for the convenience of the reader at the rate of Ps.20.5835 per U.S. $1.00 as the rate for the payment of obligations denominated in foreign currency payable in Mexico in effect on December 31, 2021. Such conversions should not be construed as a representation that the peso amounts actually represent such U.S. dollar amounts or could be converted into U.S. dollars at the rate indicated, or at all.
(3)Includes routine and ordinary maintenance expenses only. See Item 5: “Operating and Financial Review and Prospects—Operating Results.”
(4)Includes, among other things, major maintenance expenses, which are capitalized and subsequently amortized. See Item 5: “Operating and Financial Review and Prospects—Operating Results.”
(5)Basic and diluted earnings per share amounts are calculated by dividing the income for the year attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares and unvested shares awarded under the management incentive and long-term incentive plans outstanding during the year, this is because the shares are entitled to a dividend if and when it is declared by the Company.

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(6)The basis used for the computation of the information is to multiply the earnings per basic and diluted share obtained pursuant to footnote (5) above by ten, which is the number of CPOs represented by each ADS. Each CPO, in turn, represents a financial interest in one Series A share of common stock of Volaris.
(7)Includes scheduled and charter.
(8)Includes scheduled.
(9)Excludes non-derivative financial instruments.
(10)See “Glossary of Airlines and Airline Terms” elsewhere in this annual report for definitions of terms used in this table.
(11)See detail of other current assets in Item 17: “Financial Statements”.

a.Key Performance Indicators

The following measures are often provided, and utilized by the Company’s management, analysts, and investors to enhance comparability of year-over-year results, as well as to compare results to other airlines: Revenue passenger miles, or RPMs; Average passenger revenue per booked passenger; Average non-passenger revenue per booked passenger, Total operating revenue per ASM, or TRASM; Passenger Revenue per ASMS, or RASM; Operating expenses per ASM, or CASM; CASM ex fuel, and average economic fuel cost per gallon. Average passenger revenue per booked passenger represents the total passenger revenue divided by booked passengers. The CASM ex fuel represents total operating expenses, net excluding fuel expense divided by ASMs. Average economic fuel cost per gallon represents total fuel expense net of hedging effect, divided by the total number of fuel gallons consumed. We believe this operating data is useful in reporting the operating performance of our business, however, these measures may differ from similarly titled measures reported by other companies and should not be considered in isolation or as a substitute for measures of performance in accordance with IFRS.

B.Capitalization and Indebtedness

Not Applicable.

C.

Reasons for the Offer and Use of Proceeds

Not Applicable.

D.Risk Factors

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

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

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.

15

Risks related to Mexico

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

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

Adverse social or political developments in or affecting Mexico could negatively affect us and Mexican financial markets generally, thereby affecting our ability to obtain financing. Presidential and federal congressional elections in Mexico were held on July 1, 2018. Mr. Andrés Manuel López Obrador, a member of the National Regeneration Movement (Movimiento Regeneración Nacional), was elected President of Mexico and took office on December 1, 2018. The President’s party and its allies currently hold the majority of the Chamber of Deputies and the Senate. We cannot provide any assurance that the current political situation or any future developments in Mexico will not have a material adverse effect on our business, results of operations, financial condition, or prospects.

In addition, the Mexican government has exercised, and continues to exercise, significant influence over the Mexican economy. In particular, Mexican federal governmental actions and policies concerning air transportation and similar services could have a significant impact on us. We cannot assure you that changes in Mexican federal governmental and air transportation policies, such as opening Mexican domestic segments to airlines from other countries, will not adversely affect our business, results of operations, financial condition and prospects or the price of the ADSs.

Adverse economic conditions in Mexico may adversely affect our business, results of operations and financial condition.

Most of our operations are conducted in Mexico and our business is affected by the performance of the Mexican economy. In 2019, 2020 and 2021 the Mexican economy decreased 0.2%, contracted 8.4% and grew 5.1%, respectively, in terms of gross domestic product or GDP, according to the INEGI. Moreover, in the past, Mexico has experienced prolonged periods of economic crises, caused by internal and external factors, over which we have no control. Those periods have been characterized by exchange rate instability, high inflation, high domestic interest rates, economic contraction, a reduction of international capital flows, a reduction of liquidity in the banking sector and high unemployment rates. Decreases in the growth rate of the Mexican economy, or periods of negative growth, or increases in inflation may result in lower demand for our flights, lower fares or a shift to ground transportation options, such as long-distance buses.

We cannot assure you that economic conditions in Mexico will not worsen, or that those conditions will not have an adverse effect on our business, results of operations and financial condition.

If inflation rates in Mexico increase, demand for our services may decrease and our costs may increase.

Mexico has historically 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 2.83% for 2019, 3.15% for 2020 and 7.36% for 2021. 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 resulted primarily from the impact of changes in the U.S. dollar-peso exchange rate on our U.S. dollar-denominated monetary liabilities (such as U.S. dollar-denominated debt, U.S. dollar-denominated aircraft lease payments and accounts payable arising from imports of spare parts and equipment) and assets (such as U.S. dollar-denominated cash, cash equivalents, accounts receivable, security deposits and aircraft maintenance deposits). During

16

2021, our U.S. dollar-denominated monetary liabilities exceeded our U.S. dollar-denominated assets. As a result, the devaluation and appreciation of the peso resulted in exchange losses and gains, respectively.

The value of the peso has been subject to significant fluctuations with respect to the U.S. dollar in the past and may be subject to significant fluctuations in the future. In 2008, as a consequence of the global economic and financial crisis, the peso depreciated 26.7% against the U.S. dollar in nominal terms. In 2009, 2010 and 2012, the peso appreciated 5.5%, 5.2% and 6.9%, respectively, against the U.S. dollar in nominal terms. However, in 2011 and 2013, the peso depreciated 12.9% and 0.5%, respectively, against the U.S. dollar in nominal terms. This trend in fluctuations has continued as the peso appreciated 4.5%, 0.3% and 4.3% against the U.S. dollar in nominal terms in 2017, 2018 and 2019, respectively.

As of December 31, 2020 and 2021, the peso depreciated 5.8% and 3.2%, respectively, against the U.S. dollar in nominal terms since December 31, 2020.

During the second half of 2021 management identified indicators of changes in the primary economic environment in which its main subsidiary Volaris Opco operates, as follows: (i) increase in the international market transactions during 2021, (ii) change in the determination of rates (iii) most representative costs are determined and denominated in U.S. dollars. As a result, we evaluated the functional currency of its main subsidiary in accordance with the regulatory provisions contained in IAS-21 “Effects of Variations in Foreign Currency Exchange Rates”, concluding that the functional currency has changed from the Mexican peso to the U.S. dollar as of December 31, 2021.

In addition, considering the dependency of our operations related to our subsidiary Volaris Opco, management has evaluated and concluded that its functional currency has also changed from the Mexican peso to U.S. dollar as of December 31, 2021. The change in functional currency is prospectively applied from the date of the change.

Devaluation or depreciation of the peso against the U.S. dollar may adversely affect the U.S. dollar value of an investment in the ADSs, as well as the U.S. dollar value of any dividend or other distributions that we may make.

Fluctuations in the exchange rate between the peso and the U.S. dollar, particularly depreciations in the value of the peso, may adversely affect the U.S. dollar equivalent of the peso price of the Series A shares on the Mexican Stock Exchange. Such peso depreciations will likely affect the market price of the ADSs. Exchange rate fluctuations would also affect the U.S. dollar equivalent value of any dividends and other distributions we may elect to make in the future and may affect the timely payment of any peso cash dividends and other distributions to holders of CPOs that we may elect to pay in the future in respect of the Series A shares.

Developments in other countries could adversely affect the Mexican economy, the market value of our securities, our financial condition and results of operations.

The market value of securities of Mexican companies is affected by economic and market conditions in developed and other emerging market countries. Although economic conditions in those countries may differ significantly from economic conditions in Mexico, investors’ reactions to developments in any of these other countries, may have an adverse effect on the market value of securities of Mexican issuers. In recent years, for example, prices of both Mexican debt and equity securities have sometimes suffered substantial drops as a result of developments in other countries. In 2008-2009, credit issues in the United States related principally to the sale of sub-prime mortgages resulted in significant fluctuations in securities traded in global financial markets, including Mexico.

In addition, the direct correlation between economic conditions in Mexico and the United States has strengthened in recent years because of the North American Free Trade Agreement, or NAFTA, and increased economic activity between the two countries (including increased remittances of U.S. dollars from Mexican workers in the United States to their families in Mexico). On November 30, 2018, Mexico, the United States and Canada signed the USMCA (United States-Mexico-Canada Agreement), which entered into force on July 1, 2020, as a replacement for NAFTA. During his presidency, President Trump implemented immigration policies that have adversely affected United States—Mexico travel behavior, especially in the VFR and leisure markets. President Trump’s immigration policies had a negative impact on our results of operations. In addition, as a result of the COVID-19 pandemic, on April 22, 2020, President Trump signed a Presidential Proclamation entitled: “Suspending Entry of Immigrants Who Present Risk to the U.S. Labor Market During the Economic Recovery Following the COVID-19 Outbreak.” On January 20, 2021, Joseph Biden became the President of the United States. While President Biden reversed many of President Trump’s immigration policies, we can offer no assurance of the extent to which his administration will continue do so. In addition, even if President Biden continues to

17

reverse President Trump’s immigration policies, subsequent presidential administrations could reimpose them, which could have a material adverse effect on our operations and revenues and affect the market price of our securities, including the ADSs.

Mexican antitrust provisions may affect the fares we are permitted to charge to customers.

The Mexican Aviation Law (Ley de Aviación Civil) provides that in the event that the SCT considers that there is no effective competition among permit and concession holders (required to operate airlines in Mexico), the SCT may request the opinion of the Mexican Antitrust Commission (Comisión Federal de Competencia Económica) and then issue regulations governing the fares that may be charged for air transportation services by airlines operating in Mexico. Such regulations will be maintained only during the existence of the conditions that resulted in their establishment. The imposition of fare regulations by the SCT could materially affect our business, results of operations and financial condition.

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

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

Risks related to the airline industry

We operate in an extremely competitive industry.

We face significant competition with respect to routes, fares, services and slots in airports. Within the airline industry, we compete with legacy carriers, regional airlines and low-cost airlines on many of our routes. The intensity of the competition we face varies from route to route and depends on a number of factors, including the strength of competing airlines. Our competitors may have better brand recognition and greater financial and other resources than we do. In the event our competitors reduce their fares to levels which we are unable to match while sustaining profitable operations or are more successful in the operation of certain routes (as a result of service or otherwise), we may be required to reduce or withdraw services on the relevant routes, which may cause us to incur losses or may impact our growth, financial condition or results of operations. See Item 4: “Information on the Company—Business Overview—Competition.”

The airline industry is particularly susceptible to price discounting, because once a flight is scheduled, airlines incur only nominal additional costs to provide service to passengers occupying otherwise unsold seats. Increased fare or other price competition could adversely affect our results of operations and financial condition. Moreover, other airlines have begun to unbundle services by charging separate fees for services such as baggage transported, food and 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

18

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 38%, 26% and 34% (including derivative and non-derivative financial instruments) of our total operating costs in 2019, 2020 and 2021, 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. Because Russia is one of the world’s largest oil exporters, we expect recent global developments relating to Russia’s invasion of Ukraine, and resulting export restrictions, will likely lead to decreased global supply and increased fuel prices, which effects could be more acute if the participants of the Organization of the Petroleum Exporting Countries, or OPEC, decide not to, or are unable to, increase their supply production. Due to the large proportion of fuel costs in our total operating cost base, even a relatively small increase in the price of fuel can have a significant negative impact on our operating costs and on our business, results of operations and financial condition See Item 4: “Information on the Company—Business Overview—Fuel.”

Our inability to renew our concession or the revocation by the Mexican government of our concession would materially adversely affect us.

We hold a government concession authorizing us to provide domestic air transportation services of passengers, cargo and mail within Mexico, or our Concession. Our Concession was granted by the Mexican federal government through the SCT on May 9, 2005 initially for a period of five years and was extended by the SCT on February 17, 2010 for an additional period of ten years. On February 21, 2020, our Concession was extended for a 20-year term starting on May 9, 2020. Mexican law provides that concessions may be renewed several times. However, each renewal may not exceed 30 years and requires that the concessionaire (i) has complied with the obligations set forth in the concession title to be renewed, (ii) requests the renewal one year before the expiration of the applicable concession terms, (iii) has made an improvement in the quality of the services during the term of the concession, and (iv) accepts the new conditions established by the SCT according to the Mexican Aviation Law (Ley de Aviación Civil). Failure to renew our Concession would have a material adverse effect on our business, results of operations, financial condition and prospects and would prevent us from continuing to conduct our business.

We are required under the terms of our Concession to comply with certain ongoing obligations. Failure to comply with these obligations could result in penalties against us. In addition, the Mexican government has the right to revoke our Concession and the permits we currently hold for various reasons including: service interruptions; our failure to comply with the terms of our Concession; if we assign or transfer rights under our Concession or permits; if we fail to maintain insurance required under applicable law; if we charge fares different from fares registered with the SCT; if we violate statutory safety conditions; and if we fail to pay statutory indemnification or if we fail to pay to the Mexican government the required compensation. For more information on the potential causes for revocation of our Concession and permits, see Item 4: “Information of the Company—Regulation.” If our Concession or permits are revoked, we will be unable to operate our business as it is currently operated and be precluded from obtaining a new concession or permit for five years from the date of revocation.

Under Mexican law, our assets could be taken or seized by the Mexican government under certain circumstances.

Pursuant to Mexican law and our Concession, the Mexican federal government may take or seize our assets, temporarily or permanently, including the aircraft, in the event of natural disasters, war, serious changes to public order or in the event of imminent danger to the national security, internal peace or the national economy. The Mexican federal government, in all cases, except in the event of international war, must indemnify us by paying the respective losses and damages at market value. In these circumstances, we would not be able to continue with our normal operations. Applicable law is unclear as to how indemnification is determined and the timing of payment thereof. A temporary seizure of our assets is likely to have a material adverse effect on our business, results of operations and financial condition.

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The airline industry is particularly sensitive to changes in economic conditions. The recent global economic contraction or a reoccurrence of similar conditions could negatively impact our business, results of operations and financial condition.

Our business and the airline industry in general are affected by changing economic conditions beyond our control, including, among others:

changes and volatility in general economic conditions, including the severity and duration of any downturn in Mexico, the United States or global economy and financial markets;
changes in consumer preferences, perceptions, spending patterns or demographic trends, including any increased preference for higher-fare carriers offering higher amenity levels, and reduced preferences for low-fare carriers offering more basic transportation, during better economic times or for other reasons;
higher levels of unemployment and varying levels of disposable or discretionary income;
health outbreaks, pandemics and concerns with safety;
depressed housing and stock market prices;
lower levels of actual or perceived consumer confidence;
high inflation rates; and
exchange rate volatility and increased fuel prices, especially in the context of the conflict between Russia and Ukraine.

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.

Further, in an inflationary environment, such as the current U.S. and Mexico economic environment, depending on airline industry and other economic conditions, we may be unable to manage through the resulting increases in our operating costs. We cannot predict how long the current inflationary period will last or the extent to which high inflation may occur in the economy in the future. As such, we cannot guarantee we will be able to maintain our costs. If our costs increase and we are no longer able to maintain a competitive cost structure, it could have a material adverse effect on our business, results of operations and financial condition.

The airline industry is heavily regulated and our financial condition and results of operations could be materially adversely affected if we fail to maintain the required U.S., Mexican, Central American and South American governmental concessions or authorizations necessary for our operations.

The airline industry is heavily regulated and we are subject to regulation in Mexico and in the United States for the routes we serve between Mexico and the United States. In order to maintain the necessary concessions or authorizations issued by the SCT, acting through the AFAC, the FAA and some of the aviation authorities in the Latin American countries in which we operate, including authorizations to operate our routes, we must continue to comply with applicable statutes, rules and regulations pertaining to the airline industry, including any rules and regulations that may be adopted in the future. We cannot predict which criteria the SCT will apply for awarding rights to landing slots, bi-lateral agreements, and international routes, which may prevent us from obtaining routes that may become available. In addition, international routes are limited by bi-lateral agreements and not obtaining them will limit our expansion plans in the international market. Furthermore, we cannot predict or control any actions that the AFAC, FAA or the aviation authorities in the Latin American countries in which we operate may take in the future, which could include restricting our operations or imposing new and costly regulations. Also, our fares are subject to review by the AFAC, the FAA and some of the

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aviation authorities in the Latin American countries in which we operate, either of which may in the future impose restrictions on our fares. Our business, results of operations and financial condition could be materially adversely affected if we fail to maintain the required U.S., Mexican, Central American and South American governmental concessions or authorizations or slots 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, or 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 EPA 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 emissions, including aircraft emissions, in the United States and Mexico. Future operations and financial results may vary as a result of such regulations in the United States and equivalent regulations adopted by other countries, including Mexico. Compliance with these regulations and new or existing regulations that may be applicable to us in the future could increase our cost base and could have a material adverse effect on our business, results of operations and financial condition.

Furthermore, in 2016 the International Civil Aviation Organization, or ICAO, adopted a resolution creating the Carbon Offsetting and Reduction Scheme for International Aviation, or CORSIA, providing a framework for a global market-based measure to stabilize CO2 emissions in international civil aviation (i.e., civil aviation flights that depart in one country and arrive in a different country). CORSIA will be implemented in phases, starting with the participation of ICAO members on a voluntary basis during a pilot phase (from 2021 through 2023), followed by a first phase (from 2024 through 2026) and a second phase (from 2027). Currently, CORSIA focuses on defining standards for monitoring, reporting and verification of emissions from air operators, as well as on defining steps to offset CO2 emissions. To the extent most of the countries in which we operate continue to be ICAO member states, in the future we may be affected by regulations adopted pursuant to the CORSIA framework. In addition, in January 2021, the EPA finalized greenhouse gas emission standards for new aircraft engines designed to implement the ICAO standards on the same timeframe contemplated by the ICAO. Like the ICAO standards, the final EPA standards would not apply to engines on in-service aircraft. The final standards have been challenged by several states and environmental groups, and the Biden administration has announced plans to review these final standards along with others issued by the prior administration. The outcome of the legal challenge and administrative review cannot be predicted at this time. Certain CORSIA details remain to be developed and could potentially be affected by political developments in participating countries or the results of the pilot phase of the program, and thus the impact of CORSIA cannot be predicted at this time. However, CORSIA is expected to increase operating costs for airlines that operate internationally.

Growing recognition among stakeholders of the dangers of climate change and related risks may translate, among others, into financial and reputational risks. Additionally, customers may choose to fly less frequently or fly on an airline they perceive as operating in a manner that is more sustainable to the climate. Customers may choose to use alternatives to travel, such as virtual meetings and workspaces. In addition, the potential acute and chronic physical effects of climate change, such as increased frequency and severity of storms, floods, fires, sea-level rise, excessive heat, longer-term changes in weather patterns and other climate-related events, could affect our operations, infrastructure and financial results. Operational impacts, such as the canceling of flights, could result in loss of revenue. We could also incur significant costs to improve the climate resiliency of our infrastructure and otherwise prepare for, respond to, and mitigate such physical effects of climate change. As of the date of this annual report, we are not able to predict accurately the materiality of any potential losses or costs associated with the physical effects of climate change.

Compliance with airline industry regulations involves significant costs and regulations enacted in Mexico, the United States, Central America and South America may increase our costs significantly in the future.

Airlines are subject to extensive regulatory and legal compliance requirements, both domestically and internationally, that involve significant costs. In the last several years, the U.S. Congress has passed laws, and the DOT, FAA and TSA have issued regulations, relating to the operation of airlines that have required significant expenditures. FAA requirements cover, among other

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things, collision avoidance systems, airborne wind shear avoidance systems, noise abatement and other environmental issues, and increased inspections and maintenance procedures to be conducted on older aircraft. We expect to continue to incur expenses in connection with complying with government regulations. Additional laws, regulations, taxes and airport rates and charges have been proposed from time to time that could significantly increase the cost of airline operations or reduce the demand for air travel. If adopted, these measures could have the effect of raising ticket prices, reducing revenue and increasing costs. For example, the DOT finalized rules, taking effect on April 29, 2010, requiring new procedures for customer handling during long onboard tarmac delays, as well as additional reporting requirements for airlines that could increase the cost of airline operations or reduce revenues.

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

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

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

On July 26, 2017 amendments to the Mexican Aviation Law (Ley de Aviación Civil) and the Mexican Consumer Protection Law were enacted to provide for additional passenger rights, and this legislation has increased our costs and has reduced our ability to charge for certain ancillary services.

Furthermore, we cannot assure you that airline industry regulations enacted in the future in Mexico, Central America, South America and the United States will not increase our costs significantly.

Airlines are often affected by factors beyond their control, including air traffic congestion at airports, weather conditions, health outbreaks or concerns, pandemics, or increased security measures, any of which could harm our business, results of operations and financial condition.

Like other airlines, we are subject to delays caused by factors beyond our control, including air traffic congestion at airports, air traffic control inefficiencies, adverse weather conditions, health outbreaks or concerns, increased security measures and new travel related taxes. Delays frustrate passengers, reduce aircraft utilization and increase costs, all of which in turn could adversely affect profitability. The federal governments of Mexico, the United States and the countries in Central and South America in which we operate control their respective airspace and airlines are completely dependent on the AFAC, the FAA and the aviation authorities in Central and South America to operate these airspaces in a safe, efficient and affordable manner. The air traffic control system, which is operated by Services to the Navigation in the Mexican Air Space (Servicios a la Navegación en el Espacio Aéreo Mexicano) in Mexico, the FAA in the United States and the Central American Corporation of Aerial Navigation Services (Corporación Centroamericana de Servicios de Navegación Aérea) in Central America, the Air Navigation Services Directorate (Dirección de Servicios a la Navegación Aérea) in Colombia, and the Peruvian Corporation of Airports and Commercial Aviation (Corporación Peruana de Aeropuertos y Aviación Comercial) in Peru 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

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significant delays. Cancellations or delays due to weather conditions or natural disasters, air traffic control problems, health outbreaks or concerns, pandemics, breaches in security or other factors and any resulting reduction in airline passenger traffic could have a material adverse effect on our business, results of operations and financial condition.

Airline consolidations and reorganizations could adversely affect the industry.

The airline industry has undergone substantial consolidation throughout the years and recently, and it may undergo additional consolidation in the future. Any consolidation or significant alliance activity within the airline industry could increase the size and resources of our competitors. In particular, the airline industry in Mexico has seen a sharp contraction, with the exit of eight Mexican airlines since 2007, the most recent one being Interjet, our third largest competitor by market share in 2020, which has been unable to resume flights since suspending their operations in December 2020. Interjet’s fleet decreased by 100% in 2021, from three aircraft as of December 31, 2020 to zero as of December 31, 2021, according to information published by the AFAC. According to media reports, on April 26, 2021, Interjet announced that its shareholders had approved the filing of a reorganization process (concurso mercantil) in Mexico. We cannot predict the outcome of Interjet’s future financial condition or whether we will be awarded any of its slots in the Mexico City International Airport, some of which we currently operate.

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

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

Increases in insurance costs and/or significant reductions in coverage would harm our business, results of operations and financial condition.

Following the September 11, 2001 terrorist attacks, premiums for insurance against aircraft damage and liability to third parties increased substantially, and insurers could reduce their coverage or increase their premiums even further in the event of additional terrorist attacks, hijackings, wars, seizures/confiscations, 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.

A general increase in the cost of insurance coverage, including as a consequence of the COVID-19 pandemic, may result in both higher fares and a decreased demand for air travel generally, which could materially and negatively affect our business, results of operations and financial condition.

Downturns in the airline industry caused by terrorist attacks or war, which may alter travel behavior or increase costs, may adversely affect our business, results of operations and financial condition.

Demand for air transportation may be adversely affected by terrorist attacks, war or political and social instability, natural disasters and other events. Furthermore, these types of situations could have a prolonged effect on air transportation demand and on certain cost items.

The terrorist attacks in the United States on September 11, 2001, for example, have had a severe and lasting adverse impact on the airline industry. Airline traffic in the United States fell dramatically after the attacks and decreased severely throughout Latin America. The repercussions of September 11, including increases in security, insurance and fear of similar attacks, continue to affect us and the airline industry. Since September 11, 2001, the DHS and the TSA in the United States have implemented numerous security

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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, or SARS, the Zika virus, COVID-19 and other highly communicable diseases, could affect suspension of domestic and international flights, travel behavior and could have a material adverse effect on the Mexican economy, airline industry reputation, the price of our shares, our business, results of operations and financial condition.

During the second quarter of 2009, passenger traffic was negatively affected as a result of the H1N1 flu crisis, which resulted in lower overall demand for intra-Latin America travel, especially to and from Mexico. In the past, Latin American travel has been negatively affected as a result of the Zika virus. Most recently, the outbreak of COVID-19 that has grown into a global pandemic was first reported on December 31, 2019 in Wuhan, Hubei Province, China. From Wuhan, the disease spread rapidly to other parts of China as well as other countries, including Mexico and the United States. Since the pandemic began, countries around the world have responded by taking various containment measures, including imposing quarantines and medical screenings, restricting domestic and international travel, closing borders, restricting or prohibiting public gatherings and widely suspending previously scheduled activities and events. In addition, concerns related to COVID-19 have drastically reduced demand for air travel and caused major disruptions and volatility in global financial markets, resulting in the fall of stock prices (including the price of our stock), both trends which may continue. There are other broad and continuing concerns related to the potential effects of COVID-19 on international trade (including supply chain disruptions and export levels), travel, restrictions on our ability to access our facilities or aircraft, requirements to collect additional passenger data, employee productivity, employee illness, increased unemployment levels, securities markets, and other economic activities, particularly for airlines, that may have a destabilizing effect on financial markets and economic activity. In addition, our operations could be negatively affected if essential employees are required to be quarantined as the result of an actual or suspected exposure to COVID-19. In the case of a COVID-19-related shutdown involving us or any of our subsidiaries, our contractors, suppliers, customers and other business partners, our business, results of operations and financial condition may also be materially adversely affected. Furthermore, any actions taken by governmental authorities and other third parties in response to the pandemic may negatively impact our business, results of operations and financial condition.

As of the date of this report, COVID-19 continues to be one of the biggest risks not only in public health issues, but also in the economic environment. The governments in the markets in which we operate have implemented, and continue to implement, measures to control COVID-19, such as COVID-19 vaccination programs. These measures have stimulated growth in the tourism sector and the demand for air travel. For the year ended December 31, 2021, our ASMs increased by 53.7% and 14.7% compared to the years ended December 31, 2020 and 2019, respectively. We managed to recover our pre-pandemic capacity despite spikes in COVID-19 cases, especially during the first half of 2021. In addition, we restarted our operations in Costa Rica, Guatemala and El Salvador, as the governments in these countries eased restrictions on air travel.

We can offer no assurance that additional travel restrictions, requirements or border closures will not be enacted or reenacted in the countries where we operate, which could result in reduced passenger demand, revenue, and further capacity reductions. In addition, if governments in the markets in which we operate impose total or partial lockdowns in all or part of their respective jurisdictions or shut down airports in response to the COVID-19 pandemic, it may result in our inability to operate flights, which would have a material adverse effect on our business, results of operation and financial condition.

The growth in the Mexican domestic and international air traffic since the third quarter of 2020 has been led by leisure and VFR travelers, while business travel remains reduced as a large percentage of the workforce continues to work from home. Equity research analysts and other industry executives believe that the positive trends in leisure and VFR travel will continue as the global markets recover from the pandemic and the business markets strengthen its recovery towards normal levels. However, we can offer no assurance that we will benefit from a rebound in travel demand.

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Our business and the airline industry have experienced material adverse impacts due to the COVID-19 pandemic. We cannot offer any assurance that these impacts will not intensify to the extent that COVID-19 persists throughout Mexico. Further, additional government COVID-19 response measures remain unknown and depend on future developments with respect to COVID-19, including the scope and duration of the pandemic, which are highly fluid, uncertain and cannot be predicted. It is not yet possible to determine when the adverse effects of COVID-19 will abate and the extent to which they will further decrease demand for air travel, which could continue to materially and negatively affect our business, results of operations and financial condition. Furthermore, although our cash flows from operations and our available capital have been sufficient to meet our obligations and commitments to date, our liquidity has been, and may in the future be, negatively affected by the risk factors discussed herein, including risks related to future results arising from the COVID-19 pandemic. If our liquidity is materially diminished, we might not be able to timely pay our leases and debts or comply with certain operating and financial covenants under our financing agreements or with other material provisions of our contractual obligations.

Furthermore, the COVID-19 pandemic has also resulted in increased volatility in both the local and the international financial markets and economic indicators, such as exchange rates, interest rates, credit spreads and commodity prices. Any shocks or unexpected movements in these market factors could result in financial losses.

For more information about the current status of COVID-19 in Mexico and the impact on us, see “Item 5. Operating and Financial Review and Prospects—Recent Developments” and “Item 5. Operating and Financial Review and Prospects—Trends and Uncertainties Affecting Our Business.”

Risks related to our business

We may not be able to implement our growth strategy.

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

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

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;
manage through, and have adequate response for, global or local pandemics, such as the COVID-19 pandemic;
comply with environmental regulations;
renew or maintain our Concessions;
gain access to international routes;
hire, train and retain qualified pilots, flight attendants, maintenance technicians, ground personnel and other personnel; and
obtain financing to acquire new aircraft and in connection with our operations.

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Our growth depends upon our ability to maintain a safe and secure operation. An inability to hire and retain trained personnel, maintain suitable arrangements with our union, timely secure the required equipment, facilities and airport services in a cost-effective manner, operate our business efficiently or obtain or maintain the necessary regulatory approvals may adversely affect our ability to achieve our growth strategy, which could harm our business. In addition, expansion to new international markets may have other risks due to factors specific to those markets. We may be unable to foresee all of the risks attendant upon entering certain new international markets or respond adequately to these risks, and our growth strategy and our business may suffer as a result. In addition, our competitors may reduce their fares and/or offer special promotions following our entry into a new market. We cannot assure you that we will be able to profitably expand our existing markets or establish new markets.

Our target growth markets are in Mexico, the United States and Latin America, including countries with less developed economies that may be vulnerable to more unstable economic and political conditions, such as significant fluctuations in GDP, interest and currency exchange rates, civil disturbances, government instability, nationalization and expropriation of private assets and the imposition of taxes or other charges by governments. The occurrence of any of these events in markets served by us and the resulting instability may adversely affect our ability to implement our growth strategy.

Expansion of our markets and services may also strain our existing management resources and operational, financial and management information systems to the point that they may no longer be adequate to support our operations, requiring us to make significant expenditures in these areas. We expect that we will need to develop further financial, operational and management controls, reporting systems and procedures to accommodate future growth. We cannot assure you that we will be able to develop these controls, systems or procedures on a timely basis, and the failure to do so could harm our business.

Our ultra-low-cost structure is one of our primary competitive advantages and many factors could affect our ability to control our costs.

Our ultra-low-cost structure is one of our primary competitive advantages. However, we have limited control over many of our costs. For example, we have limited control over the price and availability of fuel, aviation insurance, airport and related infrastructure taxes, the cost of meeting changing regulatory requirements, and our cost to access capital or financing. We cannot guarantee we will be able to maintain a cost advantage over our competitors. If our cost structure increases and we are no longer able to maintain a cost advantage over our competitors, it could have a material adverse effect on our business, results of operations, financial condition and prospects.

Our fuel hedging strategy may not reduce our fuel costs.

Our fuel hedging policy allows us to enter into fuel derivative instruments to hedge against changes in fuel prices when we have excess cash available to support the costs of such hedges. As of December 31, 2021, we did not have hedge positions for our projected fuel requirements.

To the extent the Company decides to start a hedging program to hedge a portion of its future fuel requirements, such hedging program may not be successful in mitigating higher fuel costs and any price protection provided may be limited due to the choice of hedging instruments and market conditions, including breakdown of correlation between hedging instrument and market price of aircraft fuel and failure of hedge counterparties. To the extent that the Company decides to use hedge contracts that have the potential to create an obligation to pay upon settlement if fuel prices decline significantly, such hedge contracts may limit the Company's ability to benefit fully from lower fuel prices in the future. If fuel prices decline significantly from the levels existing at the time the Company enters into a hedge contract, the Company may be required to post collateral (margin) beyond certain thresholds. There can be no assurance that the Company's hedging arrangements, if any, would provide any particular level of protection against rises in fuel prices or that its counterparties will be able to perform under the Company's hedging arrangements. Additionally, deterioration in the Company's financial condition could negatively affect its ability to enter into hedge contracts in the future.

There is no assurance that we will be able to secure new fuel derivative contracts or transactions 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 ULCC.

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

The airline business is capital intensive and, as a result, many airline companies are highly leveraged. Most of our aircraft and spare engines are leased, and we paid the lessors rent and maintenance deposits aggregating U.S. $452.2 million and U.S. $80.2 million, respectively, in 2021, and have future operating lease obligations aggregating U.S. $2.4 billion over the next 12 years. In addition, we have significant obligations for aircraft and engines that we have ordered from Airbus, IAE International Aero Engines AG, or IAE, and Pratt & Whitney, or P&W, respectively, for delivery over the next eight years. Our ability to pay the fixed costs associated with our contractual obligations will depend on our operating performance and cash flow, which will in turn depend on, among other things, the success of our current business strategy, whether fuel prices continue at current price levels and/or further increase or decrease, further weakening or improvement in the Mexican and U.S. economies, whether financing is available on reasonable terms or at all, as well as general economic and political conditions and other factors that are, to some extent, beyond our control. The amount of our aircraft related fixed obligations could have a material adverse effect on our business, results of operations and financial condition and could:

require a substantial portion of cash flow from our operations for operating lease and maintenance deposit payments, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;
limit our ability to make required pre-delivery deposit payments to Airbus for our aircraft on order;
limit our ability to obtain additional financing to support our expansion plans and for working capital and other purposes on acceptable terms or at all;
make it more difficult for us to pay our other obligations as they become due during adverse general economic and market industry conditions because any related decrease in revenues could cause us to not have sufficient cash flows from operations to make our scheduled payments;
reduce our flexibility in planning for, or reacting to, changes in our business and the airline industry and, consequently, place us at a competitive disadvantage to our competitors with less fixed payment obligations; and
cause us to lose access to one or more aircraft and forfeit our rent and purchase deposits if we are unable to make our required aircraft lease rental payments or purchase installments and our lessors exercise their remedies under the lease agreement including under cross default provisions in certain of our leases.

A failure to pay our operating leases and other fixed cost obligations or a breach of our contractual obligations could result in a variety of adverse consequences, including the exercise of remedies by our creditors and lessors. In such a situation, it is unlikely that we would be able to fulfill our obligations, make required lease payments or otherwise cover our fixed costs, which would have a material adverse effect on our business, results of operations and financial condition.

Inability to obtain lease or debt financing for additional aircraft would impair our growth strategy.

We presently finance our aircraft through operating leases as well as sale and leaseback arrangements. In the future, we may elect to own a portion of our fleet as well as continue to lease aircraft through long-term operating leases. We may not be able to obtain lease or debt financing on terms attractive to us, or at all. To the extent we cannot obtain such financing on acceptable terms or at all, we may be required to modify our aircraft acquisition plans or to incur higher than anticipated financing costs, which would have an adverse impact on the execution of our growth strategy and business.

Furthermore, upon the adoption of Cape Town Treaty, an international treaty intended to standardize transactions for movable property such as aircraft and aircraft engines, Mexico selected the Alternative B insolvency provision, which gives more discretion to debtors and local courts to determine if and when defaults must be cured, or the aircraft returned to its owner or creditor. Mexico’s selection of this insolvency provision may limit our access to, or increase our costs of, financing in the event we elect to own a portion of our fleet. Uncertainty regarding the rights of creditors in a Mexican bankruptcy proceeding and the factors discussed above may inhibit our ability to lease or acquire new aircraft on attractive terms or at all, which may have a material adverse impact on our business, financial condition and results of operations. In addition, if we are unable to obtain the financing necessary to acquire

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an aircraft for which we have entered into a binding purchase agreement and fail to cancel the order or delay delivery of the aircraft, we would be in default under the related purchase agreement. Potential liability for damages in the event of such a default could have a material adverse impact on our financial condition and results of operations.

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 Cancun 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 Cancun airports. Routes through Mexico City, Tijuana, Guadalajara and Cancun make up a large portion of the balance of our routes. The Mexico City International Airport has been declared saturated and we cannot guarantee that in the future we may obtain additional slots in Mexico City. While we were permitted to use additional slots as a result of decreased operations by certain of our competitors facing financial difficulties during the pandemic, we will not be granted historical priority of the slots unless certain conditions are met, including the termination of a waiver of the minimum usage requirement which is currently in place. As such, we can offer no assurance that we will be permitted to continue to use these slots in the future. In addition, we cannot provide any kind of assurance with respect to the changes, risks and costs related to the operation of Mexico City’s Airport System (Sistema Aeroportuario de la Ciudad de México), including having to operate more than one airport in the Mexico City metropolitan area due to the construction and operation of the Felipe Ángeles International Airport, which may have an impact in our business, operation results and financial condition. 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, 2021, the average age of our 101 aircraft in service was 5.4 years. Our relatively new aircraft require less maintenance now than they will in the future. Our fleet will require more maintenance as it ages and our maintenance and repair expenses for each of our aircraft will be incurred at approximately the same intervals. In addition, the terms of most of our lease agreements require us to pay supplemental rent, also known as maintenance deposits, to be paid to the lessor in advance of the performance of major maintenance, resulting in our recording significant aircraft maintenance deposits on our statements of financial position. We expect scheduled and unscheduled aircraft maintenance expenses to increase as a percentage of our revenue over the next several years. Any significant increase in maintenance and repair expenses would have a material adverse effect on our margins and our business, results of operations and financial condition.

Our business could be harmed by a change in the availability or cost of air transport infrastructure and airport facilities.

The lack of adequate air transport infrastructure can have a direct adverse impact on our business operations, including our future expansion plans. The availability and cost of terminal space, slots and aircraft parking are critical to our operations. Additional ground and maintenance facilities, including gates and hangars and support equipment will be required to operate additional aircraft in line with our expansion plans and may be unavailable in a timely or economic manner in certain airports. Our inability to lease, acquire or access airport facilities on reasonable terms, at preferred times or based upon adequate service, to support our operations and growth could have a material adverse effect on our operations. Further, as old airports become modernized or new airports are constructed, this may lead to increases in the costs of using airport infrastructure and facilities and may also result in an increase in related costs such as landing charges. Such increases may adversely affect our business, results of operations and financial condition.

Our ability to pass on such increased costs to our passengers is limited by several factors, including economic and competitive conditions.

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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, and any such increases could have an adverse effect on our results of operations and financial condition.

Certain airports that we serve (or that we plan to serve in the future) are subject to capacity constraints and impose slot restrictions during certain periods of the day. As a result, we cannot assure you that we will be able to obtain a sufficient number of slots, gates and other facilities at airports to maintain or expand our services as we are proposing to do. It is also possible that airports not currently subject to capacity constraints may become so in the future. In addition, an airline must use its slots on a regular and timely basis or risk having those slots reallocated to other airlines. Where slots or other airport resources are not available or their availability is restricted in some way, we may have to amend our schedules, change routes or reduce aircraft utilization, any of which could have an adverse effect on our business, results of operations and financial condition.

In addition, some of the airports we serve impose various restrictions, including limits on aircraft noise levels, limits on the number of average daily departures and curfews on runway use. We cannot assure you that airports at which there are no such restrictions may not implement restrictions in the future or that, where such restrictions exist, they may not become more onerous. Such restrictions may limit our ability to continue to provide or to increase services at such airports.

Our reputation and business could be adversely affected in the event of an emergency, accident or similar incident involving our aircraft.

We are exposed to potential significant losses and material adverse effects on our business in the event that any of our aircraft is subject to an emergency, accident, terrorist incident or other similar incident, and significant costs related to passenger claims, repairs or replacement of a damaged aircraft and its temporary or permanent loss from service. There can be no assurance that we will not be affected by such events, or that the amount of our insurance coverage will be adequate in the event such circumstances arise and any such event could cause a substantial increase in our insurance premiums. See “—Increases in insurance costs and/or significant reductions in coverage would harm our business, results of operations and financial condition.” In addition, any future aircraft emergency, accident or similar incident, even if fully covered by insurance or even if it does not involve our airline, may create a public perception that our airline or the equipment we fly is less safe or reliable than other transportation alternatives, which could have an adverse impact on our reputation and could have a material adverse effect on our business, results of operations and financial condition.

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

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

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

We have entered into aircraft and engine operating lease agreements and sale and leaseback arrangements with various lessors. These agreements contain certain events of default and also require us to comply with certain covenants, including covenants triggered by a change of control, during the term of each agreement. The lease agreements generally provide for events of default if (i) we fail to obtain or maintain the insurance required, (ii) we breach any covenant or representation and warranty and do not cure it within the agreed time periods, (iii) we do not have unencumbered control or possession of the aircraft or engines, (iv) we discontinue (temporarily or otherwise) business or sell or otherwise dispose of all or substantially all of our assets, (v) we no longer possess the licenses, certificates and permits required for the conduct of our business as a certificated air carrier, (vi) Volaris Opco experiences a change of control, or (vii) we fail to pay when due any airport or navigation charges or any landing fees assessed with respect to the aircraft or any aircraft operated by us which, if unpaid, may give rise to any lien, right of detention, right of sale or other security

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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 12.94 block hours in 2019, 11.30 block hours in 2020 and 12.53 block hours in 2021. Aircraft utilization is the average amount of time per day that our aircraft spend carrying passengers. Our revenue per aircraft can be increased by high daily aircraft utilization, which is achieved in part by reducing turnaround times at airports, so we can fly more hours on average in a day. Aircraft utilization is reduced by delays and cancellations arising from various factors, many of which are beyond our control, including air traffic congestion at airports or other air traffic control problems, adverse weather conditions, increased security measures or breaches in security, international or domestic conflicts, terrorist activity, health outbreaks or other changes in business conditions. In addition, pulling aircraft out of service for unscheduled and scheduled maintenance, which will increase as our fleet ages, may materially reduce our average fleet utilization. High aircraft utilization increases the risk that if an aircraft falls behind schedule during the day, it could remain behind schedule during the remainder of that day and potentially into the next day, which can result in disruption in operating performance, leading to passenger dissatisfaction related to delayed or cancelled flights and missed connections. Due to the relatively small size of our fleet and high daily aircraft utilization rate, the unavailability of one or more aircraft and resulting reduced capacity or our failure to operate within time schedules, could have a material adverse effect on our business, results of operations and financial condition.

The growth of our operations to the United States is dependent on continued favorable safety assessment in Mexico and the Central and South American countries in which we operate.

The FAA periodically audits the aviation regulatory authorities of other countries. As a result of their investigation, each country is given an International Aviation Safety Assessment, or IASA, rating. In February 2021, Costa Rica’s, IASA ratings was upgraded back to Category 1 from Category 2, 21 months, after it was downgraded due to alleged deficiencies in the Costa Rican air safety standards. In May 2021, Mexico´s IASA ratings were downgraded from Category 1 to Category 2, currently the AFAC is working to address the FAA findings. Consequently, new services and routes to the United States cannot be added, and we will be unable to add new aircraft to our FAA operations specifications. We cannot assure you that the governments of Mexico, Costa Rica and El Salvador, and the AFAC, the General Directorate of Civil Aviation (Dirección General de Aviación Civil) of Costa Rica and the Civil Aviation Authority (Autoridad de Aviación Civil) of El Salvador in particular, or the aviation authorities in the Central and South American countries in which we operate, will continue to meet international safety standards, and we have no direct control over their compliance with IASA guidelines. If the IASA ratings of Mexico, Costa Rica or the other Central and South American countries in which we operate were to be downgraded in the future, it could restrict our ability to maintain or increase service to the United States and incorporate aircraft registered in the United States into our fleet, 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, domain names system, flight operations system, financial planning, management and accounting system, telecommunications systems, website, maintenance systems and check-in kiosks. For our operations to work efficiently, our website and reservation system must be able to accommodate a high volume of traffic, maintain secure information and deliver flight information. Substantially all of our tickets are issued to passengers as electronic tickets. We depend on our reservation system, which is hosted and maintained by third-party service providers, to be able to issue, track and accept these electronic tickets. If our reservation system fails or experiences interruptions or denial of service and we are unable to book seats for any period of time, we could lose significant amounts of revenues as customers book seats on competing

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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, telecommunications, network, system maintenance and software upgrades. If our automated systems are not functioning or function partially or if the current providers were to fail to adequately provide updates or technical support for any one of our key existing systems, we could experience service disruptions and delays, which could harm our business and result in the loss of important data, increase our expenses and decrease our revenues. In the event that one or more of our primary technology or systems’ vendors goes into bankruptcy, ceases operations or fails to perform as contemplated in the agreements, replacement services may not be readily available on a timely basis, at competitive rates or at all and any transition time to a new system may be significant.

We retain or some vendors collect personal or biometrical information received from customers and have put in place security measures to protect against unauthorized access to such information. Personal or Biometrical information is further protected under applicable Mexican and United States law. Personal or Biometrical information held both offline and online is highly sensitive and, if third parties were to access such information without the customers’ prior consent or if third parties were to misappropriate that information, our reputation could be adversely affected and customers could bring legal claims against us, any of which could adversely affect our business, results of operations and financial condition. In addition, we may be liable to credit card companies should any credit card information be accessed and misused as a result of lack of sufficient security systems implemented by us or our vendors certified for this purpose.

In addition, our automated systems cannot be completely protected against events that are beyond our control, including natural disasters, computer viruses, cybersecurity incidents or telecommunications failures. Substantial or sustained system failures could cause service delays or failures and result in our customers purchasing tickets from other airlines. We have implemented security measures, back-up procedures and disaster recovery plans; however, we cannot assure you that these measures are adequate to prevent disruptions. Disruption in, changes to or a breach of, these systems could result in the disruption to our business and the loss of important data. These disruptions may also result in adverse economic consequences. Any of the foregoing could result in a material adverse effect on our business, results of operations and financial condition.

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

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

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

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

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

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

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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-passenger revenue to remain profitable, and we may not be able to maintain or increase our non-passenger revenue base.

Our business strategy significantly relies upon our portfolio of non-passenger revenues, including ancillary products and services and cargo revenue, on which we depend to remain profitable due to our ULCC strategy of low base fares. There can be no assurance that passengers will pay for additional ancillary products and services or that passengers will continue to choose to pay for the ancillary products and services we currently offer. Failure to maintain our non-passenger 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-passenger 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-passenger 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-passenger revenues are generated from (i) air travel-related services (ii) revenues from non-air-travel related services and (iii) cargo services. Air travel-related services include but are not limited to fees charged for excess baggage, bookings through the call center or third-party agencies, advanced seat selection, itinerary changes, charters and passenger charges for no-show tickets. Revenues from non- passenger revenues include commissions charged to third parties for the sale of hotel rooms, trip insurance and rental cars. Additionally, services not directly related to air transportation include Volaris’ sale of V-Club membership and the sale of advertising spaces to third parties.

In April 2011, the DOT published a broad set of final rules relating to, among other things, how airlines handle interactions with passengers through advertising, the reservations process, at the airport and on board the aircraft. The final rules require airlines to publish a full fare for a flight, including mandatory taxes and fees, and to enhance disclosure of the cost of optional products and services, including baggage charges. The rules restrict airlines from increasing ticket prices post-purchase (other than increases resulting from changes in government-imposed fees or taxes) and significantly increasing the amount and scope of compensation payable to passengers involuntarily denied boarding due to over sales. The final rules also extend the applicability of penalties to include international flights and provide that reservations made more than one week prior to flight date may be held at the quoted fare without payment, or cancelled without penalty, for 24 hours. Failure to remain in full compliance with these rules may subject us to fines or other enforcement action, including requirements to modify our passenger reservations system, which could have a material adverse effect on our business. Moreover, we cannot assure you that compliance with these new rules will not have a material adverse effect on our business.

In addition, the U.S. Congress and Federal administrative agencies have undertaken investigations of the airline industry practice of unbundling services, including public hearings held in 2010. If new taxes are imposed on non-passenger revenues, or if other laws or regulations are adopted that make unbundling of services impermissible, or more cumbersome or expensive than the new rules described above, our business, results of operations and financial condition could be materially adversely affected. Congressional and other government agency scrutiny may also change industry practice or public willingness to pay for ancillary services. See also “—Compliance with airline industry regulations involves significant costs and regulations enacted in both Mexico and the United States may increase our costs significantly in the future.”

Changes in how we or others are permitted to operate at airports could have a material adverse effect on our business, results of operations and financial condition.

Our results of operations may be affected by actions taken by the 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;

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·

increases in taxes;

·

allocation of slots;

·

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;

·

hire, train and retain qualified pilots, flight attendants, maintenance technicians, ground personnel and other personnel;

·

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 limited number of suppliers for fuel, aircraft and engines.

We rely on a limited number of suppliers for fuel, aircraft and engines. We purchase fuel from Airports and Auxiliary Services (Aeropuertos y Servicios Auxiliares), or ASA, which also supplies fuel and fills our aircraft tanks in Mexico, where we do most of the fillings. In the United States, we have entered into fuel supply agreements with suppliers such as World Fuel Services, or WFS, BP Products North America, Chevron and Associated Energy Group pursuant to which those companies or their affiliates sell fuel to us at various airports as specified in the agreements. The agreement with ASA expires on December 31, 2023 and may be terminated by us with 30-days prior notice and by ASA only if we do not pay for the fuel provided. If ASA or our other fuel providers offer fuel to one or more of our competitors at a better price or with better terms, it may materially affect our ability to compete against other airlines and may have a material effect on our business. If ASA or our other fuel providers terminate their agreements with us, are unwilling to renew them upon termination or are unable or unwilling to cover our fuel needs, we would have to seek alternative sources of fuel. Currently, no substitute exists for ASA as a fuel supplier in Mexico. We cannot assure you that we will be able to find another fuel provider or, if so, whether we will be able to find one that provides fuel in such a cost-effective a manner as our current agreements with ASA and other fuel providers at all the airports in Mexico where we operate. Failure to renew agreements or to source fuel from alternate sources will materially and adversely affect our business, results of operations and financial condition.

One of the elements of our business strategy is to save costs by operating an aircraft fleet consisting solely of Airbus A319, A320 and A321 aircraft, narrow body aircraft, powered by engines manufactured by International Aero Engines, or IAE, and Pratt & Whitney, or P&W. We currently intend to continue to rely exclusively on these aircraft and engine manufacturers for the foreseeable future. If any of Airbus, IAE or P&W is unable to perform its contractual obligations, or if we are unable to acquire or lease aircraft or engines or spare parts from other owners, operators or lessors on acceptable terms, we would have to find other suppliers for a similar type of aircraft, engine or spare parts. If we have to lease or purchase aircraft from another supplier, we would lose the significant benefits we derive from our current single fleet composition. We may also incur substantial transition costs, including costs associated with retraining our employees, replacing our manuals and adapting our facilities and maintenance programs. Our operations could also be materially affected by the failure or inability of aircraft, engine and parts suppliers to provide sufficient spare parts or related support services on a timely basis.

Any real or perceived problem with the Airbus A320 family aircraft or IAE and P&W engines could adversely affect our operations.

We operate a uniform fleet of Airbus A319, A320 and A321 aircraft, which belong to the Airbus A320 family aircraft. Our aircraft also exclusively use IAE and P&W engines. Our dependence on the Airbus A319, A320 and A321 aircraft and IAE and P&W engines makes us particularly vulnerable to any problems that might be associated with the Airbus A320 family aircraft or engines. If any design defect or mechanical problem is discovered, or if the technology relating to such aircraft 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

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with us as a result of an adverse perception of the Airbus A320 family aircraft or IAE and P&W engines due to real or perceived safety concerns or other problems. Since 2017, P&W’s PW1100G-JM engines have experienced technical and production issues worldwide. As a result, several A320neo operators, including us, have reportedly caused their aircraft to be inoperative for long periods of time. This problem has also resulted in the delay of delivery of our A320 and A321neo aircraft. We cannot assure you when such problems will be resolved by P&W.

Cyber-attacks or other cyber-incidents involving network or information technology security, including breaches in data privacy, could have an adverse effect on our business.

Cyber-attacks or other cyber-incidents involving network or information technology security may cause equipment failures or disruptions to our operations. Our inability to operate our networks as a result of such events, even for a limited period of time, may result in significant expenses or loss of market share to other airlines. Cyber-attacks, which include malware, computer viruses, phishing, denial of service and other means of disruption or unauthorized access to companies, have increased in frequency, scope and potential harm in recent years. We take preventive response and virus recovery actions to reduce the risk of cyber incidents and protect our information technology and networks, but there is always a risk that we may suffer a major cyber-attack that we are unable to repel. The costs associated with a major cyber-attack on us could increase our expenditures on cyber security measures, litigation, damage to our reputation, lost revenues from business interruption and the loss of existing customers and business partners. In addition, if we fail to prevent the theft of valuable information such as financial data and sensitive information, or if we fail to protect the privacy of customer and employee confidential data against breaches of network or information technology security, it could result in damage to our reputation, which could adversely impact customer and investor confidence. Any of these occurrences could result in a material adverse effect on our results of operations and financial condition.

In response to these threats there has been heightened legislative and regulatory focus on data privacy and cybersecurity around the globe, particularly with respect to critical infrastructure providers, including those in the transportation sector. As a result, we must comply with a proliferating and fast-evolving set of legal requirements in this area, including substantive cybersecurity standards as well as requirements for notifying regulators and affected individuals in the event of a data security incident. The regulatory environment is increasingly challenging and may present material obligations and risks to our business, including significantly expanded compliance burdens, costs and enforcement risks. Mexico’s Federal Personal Data Protection Law, or LFPDP, the European Union’s General Data Protection Regulation, or GDPR, and the California Consumer Privacy Act, or CCPA, came into effect in July 2011, May 2018 and January 2020, respectively. LFPDP, GDPR and the CCPA impose data privacy and security requirements, imposing significant costs on us and carrying substantial penalties for non-compliance. Similar regulations may be enacted by other countries and states in the future, including in Central and South America.

In addition, many of our commercial partners, including credit card companies, have imposed data security standards that we must meet. While we continue our efforts to meet these standards, new and revised standards may be imposed that may be difficult for us to meet and could increase our costs.

If we are unable to attract and retain qualified personnel or fail to maintain our company culture, our business, results of operations and financial condition could be harmed.

We require large numbers of pilots, flight attendants, maintenance technicians and other personnel, and our growth strategy will require us to hire, train and retain a significant number of new employees in the future. The airline industry has from time to time experienced a shortage of qualified personnel, particularly with respect to pilots and maintenance technicians. This has been particularly acute for Mexico. Retaining and recruiting people with the appropriate skills is particularly challenging as the economy in general, and the airline industry in particular, continue to recover from the COVID-19 pandemic resulting in competition for the human resources necessary to operate our business successfully. 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 adversely affected and we may be unable to complete our growth plans. In addition, the airline industry has, from time to time, experienced a shortage of qualified personnel and employee turnover may occur from time to time, which may not always be predictable. When we experience higher turnover, our training costs may be higher due to the significant amount of time required to train each new employee and, in particular, each new pilot. We cannot be certain that we will be able to recruit, train and retain the qualified employees that we need to replace departing employees and continue our current operations. If we are unable to hire, train and retain qualified employees, our business could be adversely affected and we may be unable to successfully complete our growth plans.

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In addition, as we hire new employees, it may be increasingly challenging to 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 our operations and geographic diversity 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. If we fail to maintain the strength of our company culture, 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 12%, 14% and 13% of our total operating expenses for the fiscal years 2019, 2020 and 2021, respectively. As of December 31, 2021, 81% of our workforce was represented by the general aviation union (Sindicato de Trabajadores de la Industria Aeronaútica, Similares y Conexos de la República Méxicana—STIAS) and thereby covered by substantially the same collective bargaining agreement entered into between us and each of our subsidiaries. The collective bargaining agreements are negotiated every two years in respect of general labor conditions and every year in connection with wages. Our current agreements with this union will expire in February 2023 with respect to salaries and February 2023 with respect to benefits. The terms and conditions of our future collective bargaining agreements may be affected by the results of collective bargaining negotiations at other airlines that may have a greater ability, due to larger scale, greater efficiency or other factors, to bear higher costs than we can. We cannot assure you that our labor costs going forward will remain competitive because in the future our labor agreements may be amended and new agreements could have terms with higher labor costs or more onerous conditions, one or more of our competitors may significantly reduce their labor costs, thereby reducing or eliminating our comparative advantages as to one or more of such competitors, or our labor costs may increase in connection with our growth. Traditionally, the relationship between Mexican legacy carriers and their unions has been complex. We may also become subject to additional collective bargaining agreements in the future as non-unionized workers may unionize or unionized workers may decide to join a different union. If we are unable to reach agreement with any of our unionized work groups on future negotiations regarding the terms of their collective bargaining agreements, we may be subject to work interruptions or stoppages. Any such action or other labor dispute with unionized employees (including negotiation of more onerous conditions), or the deterioration of the relationship between unions and businesses in Mexico, could disrupt our operations, reduce our profitability, or interfere with the ability of our management to focus on executing our business strategies.

Furthermore, changes in labor laws, such as the recent amendment to Mexican labor laws and other related regulations regarding labor subcontracting in Mexico, could adversely affect our business, results of operations and financial condition.

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

Our success depends to a significant extent upon the efforts and abilities of our senior management team and key financial and operating personnel. Competition for highly qualified personnel is intense, and the loss of any executive officer, senior manager or other key employee without adequate replacement or the inability to attract new qualified personnel could have a material adverse effect on our business, results of operations and financial condition. Experienced executives in the airline industry are difficult to source. We do not maintain key-man life insurance on our management team.

Our results of operations will fluctuate.

The airline industry is by nature cyclical and seasonal, and our operating results can be expected to vary from quarter to quarter. We generally expect demand to be greater during the summer months in the northern hemisphere, in December and around Easter, which can fall either in the first or second quarter, compared to the rest of the year. We generally experience our lowest levels of passenger traffic in February, September and October. Given our high proportion of fixed costs, seasonality can affect our profitability from quarter to quarter. Demand for air travel is also affected by factors such as economic conditions, war or the threat of war, fare levels, security and health concerns and weather conditions.

In addition, we expect our quarterly operating results to fluctuate in the future based on a variety of other factors, including:

·

the timing and success of our growth plans as we increase flights in existing markets and enter new markets;

·

changes in fuel, security, health and insurance costs;

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·

increases in personnel, marketing, aircraft ownership and other operating expenses to support our anticipated growth; and

·

the timing and amount of maintenance expenditures.

Due to the factors described above and others described in this annual report, quarter-to-quarter comparisons of operating results may not be good indicators of our future performance. In addition, it is possible that in any quarter our operating results could be below the expectations of investors and any published reports or analyses regarding our company. In that event, the price of the ADSs could decline, perhaps substantially.

We do not have a control group.

Since the completion of our initial public offering on September 23, 2013, we have not had a control group and corporate decisions requiring shareholder approval, such as the election of a majority of the board of directors, are made by the majority of our Series A shareholders, which shares are required to be owned by Mexican nationals. We no longer have a control group because holders of ADSs and CPOs do not have voting rights, and the CPOs and ADSs are voted by the CPO trustee in the same manner as the majority of the holders of Series A shares that are not represented by CPOs or ADSs. Thus, there are no large groups holding a large block. Furthermore, it is unlikely that a significant block of shareholders will form in the future because no person or group of persons is permitted to acquire more than 5% of our outstanding capital stock without our board of directors’ consent. As a result, a shareholder or shareholders of a very small number of Series A shares could determine the outcome of any shareholder vote without being a control group.

Volaris is a holding company and does not have any material assets other than the shares of its subsidiaries and its trademarks.

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 and its trademarks. Dividends or payments that Volaris may be required to make will be subject to the availability of cash provided by its subsidiaries. Transfers of cash from Volaris’ subsidiaries to Volaris may be further limited by corporate and legal requirements, or by the terms of the agreements governing our indebtedness. If a shareholder were to assert a claim against Volaris, the enforcement of any related judgment would be limited to the available assets of Volaris, rather than the assets of Volaris and its combined subsidiaries.

Changes in accounting standards could impact our reported earnings.

The accounting standard setters and other regulatory bodies periodically change the financial accounting and reporting standards that govern the preparation of our consolidated financial statements.

Any change made to accounting standards can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements.

Risks related to our securities and the ADSs

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

Future trading prices of the ADSs or Series A shares may be volatile, and could be subject to wide fluctuations in response to various factors, including:

·

changes in the market valuation of companies that provide similar services;

·

economic, regulatory, political and market conditions in Mexico, the United States and other countries;

·

industry conditions or trends;

·

availability of routes and airport space;

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·

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

·

real or perceived health and safety standards in air travel and related services;

·

our historical and anticipated quarterly and annual operating results;

·

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

·

announcements by us or others and developments affecting our business;

·

changes in technology affecting our aircraft;

·

announcements, results or actions taken by our competitors;

·

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

·

changes in financial or economic estimates by securities analysts;

·

our announcement of significant transactions or capital commitments;

·

currency devaluations and imposition of capital controls;

·

additions or departures of key management;

·

future sales of the ADSs and Series A shares;

·

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

·

accidents, health concerns, pandemics, and other events affecting airline operations;

·

media reports and publications about the safety of our aircraft or the aircraft type we operate;

·

changes in the price of fuel;

·

announcements concerning the availability of the type of aircraft we use;

·

changes in financial estimates or recommendations by securities analysts or failure to meet analysts’ performance expectations; or

·

sales of our common stock or other actions by investors with significant shareholdings.

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 Series A shares and ADSs. In the past, stockholders have sometimes instituted securities class action litigation against companies following periods of volatility in the market price of their securities. Any such litigation against us could result in substantial costs, divert management’s attention and resources, and harm our business or results of operations.

The relatively low liquidity and high volatility of the Mexican securities market may cause trading prices and volumes of our Series A shares and the ADSs to fluctuate significantly.

The Mexican Stock Exchange is one of Latin America’s largest exchanges in terms of aggregate market capitalization of the companies listed therein, but it remains relatively illiquid and volatile compared to other major foreign stock markets. 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

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developed countries. These market characteristics may limit the ability of a holder of our Series A shares to sell its Series A shares and may also adversely affect the market price of the Series A shares and, as a result, the market price of the ADSs.

If securities or industry analysts do not publish research or reports about our business, or publish negative reports about our business, our share price and trading volume could decline.

The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business. If one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume to decline.

If we issue additional equity securities in the future, shareholders may suffer dilution, and trading prices for our securities may decline.

In connection with our business strategy of expanding through acquisitions, we may finance corporate needs and expenditures, or future transactions, by issuing additional capital stock. Any such issuances of capital stock would result in the dilution of shareholders’ ownership stake. In addition, future issuances of our equity securities or sales by our shareholders or management, or the announcement that we or they intend to make such an issuance or sale, could result in a decrease in the market price of the ADSs and Series A shares.

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

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

These provisions could substantially impede the ability of a third party to control us, and be detrimental to shareholders desiring to benefit from any change of control premium paid on the sale of the company in connection with a tender offer. See Item 10: “Additional Information—Memorandum and Articles of Association—Overview—Change of Control Provisions” and “Additional Information—Memorandum and Articles of Association—Overview—Voting Rights.”

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

We may finance future corporate needs and expenditures by using shares of Series A common stock, to be evidenced by Series A shares, CPOs or ADSs. Any such issuances of such shares could result in a dilution of your ownership stake or a decrease in the market price of the ADSs or the Series A shares. In addition, our principal shareholders are entitled to rights with respect to registration of their shares under the Securities Act, pursuant to the registration rights agreement we have on file with the SEC. Please see Item 7: “Major Shareholders and related Party Transactions—Major Shareholders.” For example, on December 11, 2020 we completed a primary follow-on equity offering in which we offered 134,000,000 CPOs, in the form of ADSs, at a price to the public of U.S. $11.25 per ADS in the United States and other countries outside of Mexico, pursuant to our shelf registration statement filed with the SEC. In connection with that offering, the underwriters exercised their option to purchase up to 20,100,000 additional CPOs in the form of ADSs, for a total offering of 154,100,000 CPOs in the form of ADSs. The securities issued pursuant to the offering are 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, which releases CPOs underlying Series A shares, 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 and released 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

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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 (but no voting rights) in such Series A shares, or be sold to third parties or be delivered to non-Mexican holders to the extent then permitted by applicable law (not currently permitted).

We cannot assure you that a new trust similar to the CPO trust will be created if the current CPO trust terminates, or that, if necessary, the Series A shares represented by the CPOs will be sold at an adequate price, or that Mexican law will be amended to permit the transfer of Series A shares to non-Mexican holders in the event that the trust is terminated. In that event, unless Mexican law has changed to permit non-Mexican investors to hold our shares directly, non-Mexican holders may be required to cause all of the Series A shares represented by the CPOs to be sold to a Mexican individual or corporation.

We have obtained authorization from the Mexican Ministry of Economy (Secretaría de Economía) for the issuance up to 90% of our outstanding capital stock in CPOs. Since non-Mexican investors are required to invest in CPOs in order to hold a financial interest in our capital stock, if this 90% threshold were to be met, we would be unable to obtain additional capital contributions from non-Mexican investors.

Holders of the ADSs and CPOs have no voting rights.

Holders of the ADSs and CPOs are not entitled to vote the underlying Series A shares. As a result, holders of the ADSs and CPOs do not have any influence over the decisions made relating to our company’s business or operations, nor are they protected from the results of any such corporate action taken by our holders of Series A shares and Series B shares. Mexican investors 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 Item 10: “Additional Information—Memorandum and Articles of Association—Overview.”

Preemptive rights may be unavailable to non-Mexican holders of the ADSs and CPOs and, as a result, such holders may suffer dilution.

Except in certain limited circumstances, under Mexican law, if we issue new shares of common stock for cash as part of a capital increase, we must grant our shareholders the right to subscribe and pay for a sufficient number of shares to maintain their existing ownership percentage in our company. Rights to subscribe and pay for shares in these circumstances are known as preemptive rights. We may not legally be permitted to allow holders of ADSs and CPOs in the United States to exercise any preemptive rights in any future capital increase unless we file a registration statement with the SEC with respect to that future issuance of shares or the offering qualifies for an exemption from the registration requirements of the Securities Act and take certain corporate steps, including the publication of a preemptive rights notice in Mexico. 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 released only if the CPO deed permits the release of a number of CPOs sufficient to represent the shares to be issued to and held by the CPO trustee upon the exercise of preemptive rights. Because non-Mexican holders of ADSs and CPOs are not entitled to acquire direct ownership of the underlying Series A shares in respect of such ADSs and CPOs, they may not be able to exercise their preemptive rights if the CPO deed will not permit additional CPOs to be delivered in an amount sufficient to represent the shares of common stock to be issued as a result of the exercise of preemptive rights on behalf of non-Mexican ADS or CPO holders, unless the CPO deed is modified, or a new CPO deed is entered into, which permits delivery of the number of CPOs necessary to represent the shares to be subscribed and paid as a result of the exercise of such preemptive rights. Although we expect to take all measures necessary to maintain sufficient CPOs available to permit non-Mexican holders of ADSs and CPOs to exercise preemptive rights, if and when applicable, no assurances can be made that we will be able to do so, particularly because regulatory approvals in Mexico are necessary for the issuance and delivery of CPOs. As a result of the limitations described above, if we issue additional shares in the future in connection with circumstances giving rise to preemptive rights, the equity interests of holders of ADSs and CPOs may be diluted. See Item 10: “Additional Information—Memorandum and Articles of Association—Preemptive Rights.”

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We do not intend to pay cash dividends for the foreseeable future, and our revolving line of credit with Banco Santander México and Bancomext may limit our ability to declare and pay dividends.

We have never declared or paid cash dividends on our common stock. We currently intend to retain our future earnings, if any, to finance the further development and expansion of our business and do not intend to pay cash dividends in the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors, will require the approval of our general shareholders meeting, may only be paid if losses for prior fiscal years have been paid and if shareholders have approved the net income from which the dividends are paid and legal reserves have been created to the required levels, and will depend on our financial condition, results of operations, capital requirements, restrictions contained in current or future financing instruments and such other factors as our board of directors deems relevant.

In addition, our revolving line of credit with Banco Santander México and Bancomext may limit our ability to declare and pay dividends in the event that we fail to comply with the payment terms thereunder. See Item 5: “Operating and Financial Review and Prospects—Liquidity and Capital Resources—Loan Agreements” and Item 8: “Financial Information—Consolidated Statements and Other Financial Information—Dividend Policy.”

Minority shareholders may be less able to enforce their rights against us, our directors, or our controlling shareholders in Mexico.

Under Mexican law, the protections afforded to minority shareholders are different from those afforded to minority shareholders in the United States. For example, because Mexican laws concerning fiduciary duties of directors (i.e., the duty of care and the duty of loyalty, the only duties recognized under Mexican law) have been in existence for a relatively short period and are not as developed as securities laws in other jurisdictions, it is complex for minority shareholders to bring an action against directors for breach of these duties, as would be permitted in some other foreign jurisdictions. Also, such actions may not be initiated as a direct action, but as a shareholder derivative suit (that is for the benefit of our company and not the initiating shareholder). The grounds for shareholder derivative actions under Mexican law are limited. Even though applicable law has been modified to so permit, and procedures for class action lawsuits have been adopted in Mexico, there is very limited experience with regards to class action lawsuits and how procedures for such suits are followed in Mexico. Therefore, it will be much more difficult for minority shareholders to enforce their rights against us, our directors, or our controlling shareholders than it would be for minority shareholders of a U.S. company.

Mexico has different corporate disclosure and accounting standards than those in the United States and other countries.

A principal objective of the securities laws of the United States, Mexico and other countries is to promote full and fair disclosure of all material corporate information, including accounting information. However, there may be different or less publicly available information about issuers of securities in Mexico than is regularly made available by public companies in countries with highly developed capital markets, including the United States.

Our interest rate expense for any particular period will fluctuate based on LIBOR and other variable interest rates.

A portion of our long-term indebtedness/derivative instruments bear interest at fluctuating interest rates, based on the London Interbank Offered Rate, LIBOR, the Secured Overnight Financing Rate, SOFR, and the Tasa de Interés Interbanciaria de Equilibrio, TIIE. LIBOR, tends to fluctuate based on general short-term interest rates, rates set by the U.S. Federal Reserve and other central banks, market the supply of and demand for credit in the London interbank market and general economic conditions. SOFR is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities. TIIE is determined by Banco de Mexico (Mexican Central Bank) based on quotes presented by credit institutions. We have not hedged our interest rate exposure with respect to our floating rate debt, except for TIIE. Accordingly, our interest expense for any period will fluctuate based on LIBOR, SOFR, TIIE and other variable interest rates. To the extent the interest rates applicable to our floating rate debt increase, our expense will increase, in which event we may have difficulties making interest payments and funding our other fixed costs, and our available cash flow for general corporate requirements may be adversely affected.

On July 27, 2017, the U.K. Financial Conduct Authority (the authority that regulates LIBOR, or the FCA, announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR. In 2021, the FCA announced that one-week and two-month U.S. dollar-denominated LIBOR settings will no longer be provided or be representative after December 31, 2021, and that all other remaining U.S. dollar-denominated LIBOR settings will no longer be provided or be representative after June 30, 2023. The U.S. Federal Reserve also advised banks to cease entering into new contracts that use U.S. dollar-denominated LIBOR as a reference rate. In the United States, the Alternative Reference Rate Committee, a committee convened by the U.S. Federal Reserve that includes major market participants, has identified the Secured Overnight Financing Rate, or SOFR, a new index calculated by short-term

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repurchase agreements backed by U.S. Treasury securities, as its preferred alternative rate for U.S. dollar-denominated LIBOR. Working groups formed by financial regulators in other jurisdictions, including the U.K., the European Union, Japan and Switzerland, have also recommended alternatives to LIBOR denominated in their local currencies. Although SOFR appears to be the preferred replacement rate for U.S. dollar-denominated LIBOR, it is unclear if other benchmarks may emerge or if other rates will be adopted outside of the United States. At this time, it is not possible to predict how markets will respond to SOFR or other alternative reference rates as the transition away from LIBOR in the coming years, or what effect these changes in views or alternatives may have on financial markets for LIBOR-linked financial instruments. See Item 11: “Quantitative and Qualitative Disclosure about Market Risk—Interest Rates.”

If we are classified as a “passive foreign investment company,” or PFIC, U.S. Holders of our ADSs may realize adverse U.S. federal income tax consequences.

We would be classified as a PFIC for any taxable year if, after the application of certain look-through rules with respect to the income and assets of our subsidiaries, either: (1) 75% or more of our gross income for such taxable year is “passive income” (as defined in the relevant provisions of the Internal Revenue Code of 1986, as amended), or (2) 50% or more of the average quarterly value of our assets (which may be determined in part by our market capitalization, which is subject to change) is attributable to assets that produce or are held for the production of passive income. For this purpose, passive income includes, subject to certain exceptions, dividends, interest, rents, annuities, gains from commodities and securities transactions, net gains from the sale or exchange of property producing such passive income, net foreign currency gains and amounts derived by reason of the temporary investment of funds. Based on the market price of our ADSs and the composition of our income, assets and operations, we do not believe that we were classified as a PFIC for the taxable year ended December 31, 2021. However, this is a factual determination that must be made annually after the close of each taxable year. Therefore, there can be no assurance that we will not be classified as a PFIC for the current taxable year or for any future taxable year. Certain adverse U.S. federal income tax consequences could apply to a U.S. Holder (as discussed in more detail in “Taxation - Material U.S. Federal Income Tax Consequences”) if we are treated as a PFIC for any taxable year during which a U.S. Holder holds our ADSs

ITEM 4   INFORMATION ON THE COMPANY

A.History and Development of the Company

We were founded on October 27, 2005 under the name Controladora Vuela Compañía de Aviación, S.A. de C.V. by Blue Sky Investments, S.à r.l., Discovery Air Investments, L.P., Corporativo Vasco de Quiroga, S.A. de C.V. and Sinca Inbursa, S.A. de C.V., Sociedad de Inversión de Capitales.

On July 16, 2010, we became a variable capital investment promotion stock corporation (sociedad anónima promotora de inversión de capital variable). In June 2013, we became a variable capital public stock corporation (sociedad anónima bursátil de capital variable), under the name Controladora Vuela Compañía de Aviación, S.A.B. de C.V. See Item 9: “The Offer and Listing—Markets—The Mexican Stock Market—Mexican Securities Market Law” for a description of the differences between these two forms of legal entities.

On September 23, 2013, we and certain of our shareholders completed a dual-listing initial public offering on NYSE and the Mexican Stock Exchange. The Company raised Ps.2.68 billion (approximately U.S. $207.7 million) of gross proceeds from the global offering of 173,076,910 Series A shares, consisting of (i) an offering of Series A shares in Mexico and (ii) a concurrent international offering of CPOs in the form of ADSs in the United States and other countries outside of Mexico, at a public offering price of Ps.15.51 per share (U.S. $1.20 dollars) or U.S. $12.00 per ADS. Each ADS represents ten CPOs and each CPO represents a financial interest in one of our Series A shares. The Series A shares were listed on the Mexican Stock Exchange under the trading symbol “VOLAR” and the ADSs were listed on NYSE under the trading symbol “VLRS.” The Series A shares and ADSs began trading on September 18, 2013.

On November 16, 2015, certain of our principal shareholders, including affiliates of Discovery Americas, and Blue Sky Investments, exercised registration rights in the form of ADS’s and sold 99,000,000 CPOs in the form of ADSs, at a price to the public of U.S. $16.00 per ADS in the United States and the other countries outside of Mexico, pursuant to our shelf registration statement on Form F-3 filed with the SEC. In connection with that offering, the underwriters also exercised their option in full to purchase 9,900,000 additional CPOs in the form of ADSs to cover over-allotments, for a total offering of 108,900,000 CPOs in the form of ADSs.

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On December 11, 2020, pursuant to our shelf registration statement on Form F-3 and the pre-effective Amendment No. 1 to Form F-3 filed with the SEC, we sold 134,000,000 CPOs in the form of ADSs at a price to the public of U.S. $11.25 per ADS in the United States and other countries outside of Mexico. In connection with that offering, the underwriters also exercised their option in full to purchase 20,100,000 additional CPOs in the form of ADSs, for a total offering of 154,100,000 CPOs in the form of ADSs.

Overview

We are a ULCC incorporated under the laws of Mexico. Our primary corporate offices and headquarters are located in Mexico City at Av. Antonio Dovalí Jaime No. 70, 13th Floor, Tower B, Colonia Zedec Santa Fe, México City, México, zip code 01210. Our telephone number is +52-55-5261-6400. Our website is www.volaris.com. The information and contents on our website are not a part of, and are not incorporated by reference into, this Annual Report.

Since we began operations in 2006, we have increased our routes from five to more than 183 and grown our cost-efficient Airbus A320 family aircraft from four to 101 as of December 31, 2021. We currently operate up to 500 average daily flight segments on routes that connect 44 cities in Mexico as well as 22 cities in the United States, four in Central America and two in South America. We have substantial market presence in the top five airports in Mexico, based on number of passengers, comprising Cancun, Guadalajara, Mexico City, Monterrey and Tijuana. The main cities we currently serve are home to some of the most populous Mexican communities in the United States based on data from the Pew Hispanic Research Center. Additionally, our operating subsidiary in Costa Rica, Vuela Aviación, began operations on December 1, 2016, and our operating subsidiary in El Salvador, Vuela El Salvador, began operations on September 15, 2021. We seek to replicate our ultra-low-cost model in Central America and South America by offering low base fares and point-to-point service in the region.

In addition, on January 16, 2018, we signed a codeshare agreement with U.S. ULCC Frontier, which started operations on August 23, 2018. We expect this agreement, one of the first ever between ULCCs, to open additional ultra-low fare travel options between Mexico and the United States. In particular, we currently serve 22 destinations in the U.S. and 44 in Mexico, of which 18 coincide with Frontier destinations in both countries. Currently due to the downgrade of Mexico’s IASA rating we are not able to codeshare our flights with Frontier. However, once the Mexico´s IASA rating is upgraded back to Category 1, we believe that the codeshare agreement will enhance the potential for connecting itineraries.

We are one of the lowest unit cost operators worldwide, based on CASM. In 2021, our CASM was Ps.130.9 cents (U.S. $6.45 cents), compared to an average non-stage-length adjusted CASM of U.S. $12.51 cents for the other Latin American publicly traded airlines. We also have lower costs than our U.S.-based publicly traded target market competitors, including Alaska Air, Frontier, Spirit, American, Delta, JetBlue, Southwest Airlines, Allegiant and United, which had an average non-stage-length adjusted CASM of U.S. $12.87 cents in 2021. With our ULCC business model, we have grown significantly while maintaining a low CASM over the last several 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 Airbus A320neo family aircraft and leveraging our existing infrastructure to drive economies of scale. We believe that our unit cost advantage will allow us to continue to lower base fares, stimulate market demand and increase non-passenger 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 2021, our average base fare was Ps. 1,053 (U.S. $51.9) and we regularly offer promotional base fares of down to Ps. 349 (U.S. $44.99) or Ps. 299 (U.S. $34.99) for Vclub members. 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-passenger revenue and total revenue. We plan to continue to use low base fares to stimulate additional passenger demand, shift bus passengers to air travel and increase our load factor. In 2021, our average load factor was 84.7%, compared to an average load factor of 79.1% for the other Latin American publicly traded airlines and 74.9% for our U.S.-based publicly traded target market competitors. Higher load factors help us generate additional non-passenger revenue and total revenue, which in turn, allow us to further lower base fares and stimulate new demand.

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In addition to low fares, we also aim to deliver a suitable and efficient flying experience to our passengers. We strive to deliver on-time performance to our customers, with an 77.3% on-time performance rate in 2021. We believe that we have developed strong brand recognition due to our focus on delivering good value and a positive traveling experience to our customers. We believe that our corporate culture of positive “customer relationship management” has also been a key element of our success.

Principal Capital Expenditures

For the years ended December 31, 2020 and 2021, we incurred capital expenditures of Ps.3.5 billion and Ps.4.0 billion, respectively, which include acquisitions of flight equipment, spare engines, rotable spare parts, furniture and equipment and acquisitions of intangible assets. For a discussion of our capital expenditures and future projections, see Item 5: “Operating and Financial Review and Prospects—Liquidity and Capital Resources.”

Mexican Regulation

Operational Regulation

Air transportation services for passengers provided on a regular basis, as opposed to charter flights and permits, are considered a public service in Mexico. To render regular air transportations services, a concession granted by the Mexican federal government is required. The legal framework of the air transportation industry in Mexico is primarily established by the Mexican Aviation Law (Ley de Aviación Civil) and its regulations, the Mexican Airport Law (Ley de Aeropuertos) and its regulations, the Mexican General Communications Ways Law (Ley de Vias Generales de Comunicación), and applicable Mexican Official Rules (Normas Oficiales Mexicanas). The main regulatory authority overseeing air transportation is the SCT, acting mainly through the AFAC.

Pursuant to the Mexican Aviation Law, the SCT, through the AFAC, is responsible and has the authority, among others, to (i) impose and conduct the policies and programs for the regulation and development of air transportation services; (ii) grant concessions and permits, oversee compliance with, and, if applicable, resolve amendments to or termination of such concessions or permits; (iii) issue the Mexican Official Rules and other administrative provisions; (iv) provide and control the air navigation services; (v) issue and enforce the safety and health rules that must be observed in air transportation services; (vi) issue certificates of registration, certificates of airworthiness, and certificates to air services providers and declare the suspension, cancellation, revalidation or revocation of such certificates; (vii) maintain and operate the Mexican Aeronautical Registry (Registro Aéronautico Mexicano), where aircraft and leases over aircraft are regulated; (viii) participate in the international agencies and in the negotiation of treaties; (ix) promote the development and training of the aeronautical technical staff; (x) issue and, if applicable, revalidate or cancel the licenses of the aeronautical technical staff; (xi) interpret the Mexican Aviation Law and its regulations for administrative purposes; (xii) authorize the verification visits; (xiii) appoint or, if applicable, remove the regional commanding officer and the commanding officers for airports, heliports and civil airdromes in general, and (xiv) approve flight plans.

The AFAC primarily oversees and verifies compliance by the concessionaires, licensees, operators and airline services providers with the Mexican Aviation Law, its regulations, the Mexican Official Rules and any other applicable provisions.

A concession granted by the SCT is required to render domestic and regular air transportation services in Mexico. Any such concession may only be granted to Mexican entities which meet certain technical, financial, legal and administrative requirements that are deemed necessary to adequately provide services with quality, safety, and timeliness.

Other requirements to be met to obtain a concession are (i) the availability of aircraft and aircraft equipment, which is required to comply with technical requirements of safety, airworthiness conditions and environmental conditions; (ii) the availability of hangars, repair shops and infrastructure needed for operations, as well as the availability of technical and administrative staff trained for the operation of the concession; and (iii) experience in the industry. To provide any other air transportation service in Mexico, different from domestic and regular air transportation, a permit from the SCT is required pursuant to the Mexican Aviation Law.

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Concession and Permits

Through our subsidiary Volaris Opco, we hold (i) the Concession, which authorizes us to provide domestic regular passenger, cargo and mail air transportation services within Mexico, (ii) a permit for domestic charter air transportation passenger services, and (iii) a permit for international regular passenger and charter passenger air transportation services.

Our Concession was granted by the Mexican federal government through SCT, on May 9, 2005 originally for a period of five years, and was extended by SCT on February 17, 2010 for an additional period of ten years. On February 21, 2020 our Concession was extended for a 20-year term starting on May 9, 2020. The Concession authorizes us the use of certain aircraft and certain routes. Pursuant to the terms of the Mexican Aviation Law, our Concession, together with specific authorizations granted to us by the AFAC, allow us to provide domestic and international regular air transportation services. Pursuant to our Concession, we have to pay to the Mexican federal government certain fees arising from the services we render. The exhibits to the Concession must be updated every time a new aircraft is operated by Volaris Opco, any time new routes are added, or existing routes are modified. For more information regarding our aircraft and routes, see Item 4: “Information on the Company—Business Overview.”

The permit for domestic charter air transportation of passengers was granted by the SCT on April 16, 2007, without a termination date; it authorizes certain aircraft to operate under such permit and specifies, among other terms and conditions, that Volaris Opco is required to request authorization from the AFAC before carrying out any charter flight.

The permit for international charter air transportation of passengers was granted by the AFAC on June 3, 2009 for an unspecified period of time; it authorizes certain aircraft to operate under such permit and indicates, among other terms and conditions, that Volaris Opco is required to request authorization from the AFAC, before carrying out any charter flight.

To operate our aircraft, each aircraft is required to have on board its certificate of registration, its certificate of airworthiness, and its insurance policy. All aircraft must have on board all documents and equipment required by the treaties, the Mexican Aviation Law and all applicable provisions. We believe we hold all necessary operating and airworthiness authorizations, certificates and licenses, and carry all necessary insurance policies and are operating in compliance with applicable law.

The Mexican Aviation Law provides that concessions and permits may be revoked for any of the following principal reasons: (i) failure to exercise rights conferred by the concessions or permits for a period exceeding 180 calendar days from the date that such concessions or permits were granted; (ii) failure to maintain in effect the insurance required pursuant to the Mexican Aviation Law; (iii) change of nationality of the holder of the concession or permit; (iv) assignment, mortgage, transfer or conveyance of concessions, permits or rights thereunder to any foreign government or foreign state; (v) assignment, mortgage, transfer or conveyance of concessions, permits or rights thereunder to any person without the approval of the SCT; (vi) applying fares different from the registered or approved fares, as applicable; (vii) interruption of the services without authorization from the SCT, except in the events of acts of God or force majeure; (viii) rendering services different to those set forth in the respective permit or concession; (ix) failure to comply with safety conditions; (x) failure to indemnify from damages arising from the services rendered and (xi) in general, failure to comply with any obligation or condition set forth in the Mexican Aviation Law, its regulations or the respective concession or permit. In the event our Concession was revoked, for any of the reasons specified above, we will not be entitled to any compensation and we will be unable to continue to conduct our business.

Aircraft

Pursuant to the Mexican Aviation Law and our Concession, all the aircraft used to provide our services must be registered in Mexico before the Mexican Aeronautical Registry and flagged as Mexican aircraft and, if registered in other countries, such aircraft need to be authorized to operate in Mexico. The registration with the Mexican Aeronautical Registry is granted subject to compliance with certain legal and technical requirements. All the aircraft which comprise our fleet as of this date have been authorized by and registered with the AFAC.

We have to maintain our aircraft in airworthiness condition. The maintenance must be provided as specified in the manufacturers’ maintenance manuals and pursuant to a maintenance program approved by the AFAC. The AFAC has authority to inspect our aircraft, their maintenance records and our safety procedures. Based on such inspections, the AFAC may declare our aircraft unfit to fly and in certain cases revoke our Concession.

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Routes

Pursuant to the Mexican Aviation Law and our Concession, we may only provide our services on routes approved under our Concession. Any new route or change in the existing routes must be approved by the AFAC. Domestic routes are subject to our Concession and the Mexican Aviation Law. International routes to the United States are subject to our Concession, the international routes authorization permits issued by the AFAC, the Mexican Aviation Law and the USA Mexico Bilateral Air Transport Agreement dated December 18, 2015, pursuant to which we were granted a general exemption from the DOT to allow us to operate any route into the United States. The USA Mexico Bilateral Air Transport Agreement provides a legal framework for the international routes of Mexican and U.S. carriers between the United States and Mexico and vice versa. Under the USA Mexico Bilateral Air Transport Agreement any American or Mexican carrier may request authorization to fly from any city in Mexico to the United States and vice versa.

Fares

According to the Mexican Aviation Law, concessionaries or licensees of air transportation may freely set fares for the services provided by them on terms that permit the rendering of services in satisfactory conditions of quality, competitiveness, safety and consistency. The international fares must be approved by the SCT pursuant to applicable treaties except that fares for routes to and from the United States do not require approval or registration from either the SCT or any other authority. The fares (both domestic and international) must be registered with the SCT and be permanently available to users of the services. The SCT may deny the registration of fares set by the concessionaires or licensees if such fares imply predatory or monopolistic practices, dominance in the market from a competition perspective or disloyal competition which prevents the participation in the market of other concessionaires or licensees. The SCT may also set minimum and maximum levels of fares (restricting, in that case, the ability of concessionaires and holders of licenses to freely determine rates), as applicable, for the corresponding services, to promote competition. The fares will describe clearly and explicitly the restrictions such fares are subject to and will remain valid for the time and under the conditions offered. The Mexican Aviation Law provides that in the event that the SCT considers that there is no competition among concession and permit holders, the SCT may request the opinion of the Mexican Antitrust Commission and then approve regulations governing fares that may be charged for air transportation services, thus limiting the ability of participants to freely determine rates. Such regulations will be maintained only during the existence of the conditions that resulted in the negative competition effects.

Slots

Under Mexican Law, a “slot” is the schedule for the landing and taking off of aircraft. The regulation of the slots is provided by the Mexican Airport Law and its regulations. A slot is assigned to an operator by the airport administrator considering the recommendation of a committee of operations, for the organization and planning of the flights at the relevant airport. According to the regulations to the Mexican Airport Law, the operating rules of each airport in Mexico, must contain the guidelines for the assignment of slots. Therefore, the different airports’ administrations will establish in such guidelines how slots are to be assigned considering (i) the operation schedule of the airport, (ii) safety and efficiency criteria, (iii) capacity of the services providers, (iv) schedule availability, and (v) compliance with the requirements for the assignment of the slots.

Taking or Seizure

Pursuant to Mexican law and our Concession, the Mexican federal government may take or seize our assets temporarily or permanently, in the event of natural disasters, war, serious changes to public order or in the event of imminent danger to the national security, internal peace or the national economy. The Mexican federal government, in all cases, except in the event of international war, must indemnify us by paying the respective losses and damages at market value. See Item 3: “Key Information—Risk Factors—Under Mexican law, our assets could be taken or seized by the Mexican government under certain circumstances.”

Foreign Ownership

The Mexican Foreign Investment Law (Ley de Inversión Extranjera) limits foreign investment in companies rendering domestic air transportation services up to 49% of such companies’ voting stock. This limit applies to Volaris Opco, but not to us as a holding company. We, as a holding company, must remain a Mexican-investor controlled entity, as a means to control Volaris Opco. The acquisition of our Series A shares through the CPOs, that strip-out voting rights but grant any and all economic rights, by foreign investors, is deemed neutral, from a foreign investment perspective, and is not, as a result, counted as foreign investment excluded

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from this restriction. For a discussion of the procedures we instituted to ensure compliance with these foreign ownership rules, see Item 10: “Additional Information—Memorandum and Articles of Association—Other Provisions—Foreign Investment Regulations.”

Environmental Regulation

We are subject to regulations relating to the protection of the environment such as the Mexican General Law of Ecological Balance and Environmental Protection (Ley General del Equilibrio Ecológico y la Protección al Ambiente), the regulations of the Mexican General Law of Ecological Balance and Environmental Protection regarding Environmental Impact, Prevention and Control of Air Pollution and of Hazardous Waste (Reglamentos en Materia de Evaluación del Impacto Ambiental, Prevención y Control de Contaminación del Aire y Desperdicios Peligrosos), the Mexican General Law for Prevention and Handling of Wastes (Ley General de Prevención y Gestión Integral de Riesgos) and the Mexican National Waters Law (Ley Nacional de Aguas) and its regulations, official Mexican standards, international treaties, bilateral agreements and specifically by an Official Rule NOM 036 SCT3 2000 which regulates the maximum limits of the aircraft noise emissions as well as the requirements to comply with such limits. Volaris Opco is ISO 14,000 certified.

Civil Liability

The Mexican Aviation Law, the Warsaw Convention, as amended by the Montreal Convention, and the Mexican Federal Civil Code (Código Civil Federal) set forth guidelines related to the liability of an aircraft operator for damages caused to third parties during its air and ground operations, or resulting from persons or things ejected from the aircraft. Mexican courts, however, have occasionally disregarded these limitations provided by the Warsaw Convention and have awarded damages purely based on the Mexican Federal Civil Code and Mexican consumer protection regulations, resulting the awarding of damages higher than those established in the Mexican Aviation Law.

Insurance

Pursuant to Article 74 of the Mexican Aviation Law and ancillary regulations we are required to maintain insurance policies with reputable insurance companies, covering damages and/or losses for passengers, baggage, cargo and mail, as well as general third-party legal liability, for at least certain minimum amounts. Airlines must submit their insurance contracts to the SCT prior to initiating operations. For international air transport, our insurance must comply with the provisions of the applicable international treaties.

Labor Regulation

We are subject to the provisions of the Mexican Labor Law (Ley Federal del Trabajo) and the provisions contained in the collective bargaining agreements with Sindicato de Trabajadores de la Industria Aeronáutica, Similares y Conexos de la República Mexicana-STIAS. For more information on our relationship with such labor union and our labor collective bargaining agreements, see Item 6: “Directors, Senior Management and Employees—Employees.”

U.S. and International Regulation

Operational Regulation

The airline industry is heavily regulated by the U.S. government. Two of the primary regulatory authorities overseeing air transportation in the United States are the DOT and the FAA. The DOT has jurisdiction over economic issues affecting air transportation, such as unfair or deceptive competition, advertising, baggage liability and disabled passenger transportation. The DOT has authority to issue permits required for airlines to provide air transportation. We hold a Foreign Air Carrier Permit issued by the DOT that authorizes us to engage in scheduled air transportation of passengers, property and mail between Mexico and the United States, as well as on routes beyond the United States.

The FAA is responsible for regulating and overseeing matters relating to air carrier flight operations, including airline operating certificates, aircraft certification and maintenance and other matters affecting air safety. The FAA requires each non-U.S. commercial airline to obtain and hold an FAA air carrier certificate and to comply with Federal Aviation Regulations 129 and 145. This certificate, in combination with operations specifications issued to the airline by the FAA, authorizes the airline to operate at specific airports using aircraft approved by the FAA.

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As of the date of this annual report, we had FAA airworthiness certificates for 42 of our aircraft (the remainder being registered with the AFAC in Mexico), we had obtained the necessary FAA authority to fly to all of the cities we currently serve, and all of our aircraft had been certified for over-water operations. Pilots operating and mechanics providing maintenance services on “N” or U.S.-registered aircraft require a special license issued by the FAA. We hold all necessary operating and airworthiness authorizations, certificates and licenses and are operating in compliance with applicable DOT and FAA regulations, interpretations and policies.

We are also subject to the regulation of the aviation authorities in the countries of Central and South America in which we currently operate. We hold all necessary operating authorizations, certificates and licenses and are operating in compliance with applicable regulations in Central and South America.

International Regulation

Our service to the U.S. is also subject to CBP (a law enforcement agency that is part of the DHS), immigration and agriculture requirements and the requirements of equivalent foreign governmental agencies. Like other airlines flying international routes, from time to time we may be subject to civil fines and penalties imposed by CBP if un-manifested or illegal cargo, such as illegal narcotics, is found on our aircraft. These fines and penalties, which in the case of narcotics are based upon the retail value of the seizure, may be substantial. We have implemented a comprehensive security program at our airports to reduce the risk of illegal cargo being placed on our aircraft, and we seek to cooperate actively with CBP and other U.S. and foreign law enforcement agencies in investigating incidents or attempts to introduce illegal cargo onto our flights.

Our flight operations are also subject to Animal and Plant Health Inspection Service, or APHIS (an agency of the U.S. Department of Agriculture) requirements. APHIS imposes restrictions on the agricultural products that may be transported to and from the United States, how we cater our flights and how we handle trash generated during flights landing in the United States. APHIS can impose fines and penalties for non-compliance with these requirements. We comply with all APHIS cargo requirements and regulations related to our flights.

Security Regulation

The TSA was created in 2001 with the responsibility and authority to oversee the implementation, and ensure the adequacy, of security measures at airports and other transportation facilities in the United States. Since the creation of the TSA, airport security has seen significant changes including enhancement of flight deck security, the deployment of federal air marshals onboard flights, increased airport perimeter access security, increased airline crew security training, enhanced security screening of passengers, baggage, cargo and employees, training of security screening personnel, increased passenger data to CBP, background checks and restrictions on carry-on baggage. Funding for passenger security is provided in part by a per enplanement ticket tax (passenger security fee) of U.S. $5.60 for air transportation that originates at an airport in the United States. The TSA was granted authority to impose additional fees on air carriers if necessary to cover additional federal aviation security costs. Pursuant to its authority, the TSA may revise the way it assesses this fee, which could result in increased costs for passengers and/or us. We cannot forecast what additional security and safety requirements may be imposed in the future or the costs or revenue impact that would be associated with complying with such requirements.

Environmental Regulation

We are subject to various federal, state and local U.S. laws and regulations relating to the protection of the environment and affecting matters such as aircraft engine emissions, aircraft noise emissions, and the discharge or disposal of materials and chemicals, which laws and regulations are administered by numerous state and federal agencies. The EPA regulates our operations in the United States, including air carrier operations, which affect the quality of air in the United States. We believe the aircraft in our fleet meet all emission standards issued by the EPA. Concern about climate change and greenhouse gas emmissions may result in additional regulation or taxation of aircraft emissions in the United States and abroad.

U.S. law recognizes the right of airport operators with special noise issues to implement local noise abatement procedures so long as those procedures do not interfere unreasonably with interstate and foreign commerce and the national air transportation system. These restrictions can include limiting nighttime operations, directing specific aircraft operational procedures during takeoff and initial climb, and limiting the overall number of flights at an airport. None of the airports we serve currently restricts the number of flights (except New York’s John F. Kennedy Airport, which restricts the number of flights allowed for capacity reasons, not noise

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abatement) or hours of operation, although it is possible one or more of such airports may do so in the future with or without advance notice.

Other Regulations

In the United States, we are subject to certain provisions of the Communications Act of 1934, as amended, and are required to obtain an aeronautical radio license from the FCC. To the extent we are subject to FCC requirements, we take all necessary steps to comply with those requirements. We are also subject to state and local laws and regulations at locations where we operate and the regulations of various local authorities that operate the airports we serve.

Concessions and Permits

Through our subsidiaries Vuela Aviación and Vuela El Salvador, we hold concessions, which authorize us to provide regular passenger, cargo and mail air transportation services.

The Exploitation Certificate (Certificado de Explotación) of Vuela Aviación was granted by the government of Costa Rica on November 9, 2016, and remains valid until December 20, 2036. The Operating Permit (Permiso de Operación) of Vuela El Salvador was granted by the government of El Salvador on August 23, 2021, and remains valid until May 30, 2024. For more information regarding our aircraft and routes, see Item 4: “Information on the Company—Business Overview.”

Taking Seizure in El Salvador

In accordance with Salvadoran law and Vuela El Salvador´s concession, the Salvadoran government can take away or seize our assets, temporarily or permanently, can affect the aeronautical service, specifically when they are declared of national interest, being able to modify procedures when it comes to in the event of natural disasters, war, serious disturbances of public order or in the event of imminent danger to national security, internal peace or the national economy; and that the declaration of a state of emergency is derived from it. Furthermore, in all cases, the Salvadoran government must indemnify us following the calculations established by law in the case of expropriation, which an administrative process must follow only in the case of expropriations. Under these circumstances, we would not be able to continue our normal operations. Furthermore, the applicable legislation is unclear about how compensation is determined and when it is paid. Therefore, it is probable that applying the figures mentioned above that modify the free use of our assets will have a material adverse effect on our business, results of operations, and financial situation.

Future Regulations

The Mexican, U.S. and other foreign governments may consider and adopt new laws, regulations, interpretations and policies regarding a wide variety of matters that could directly or indirectly affect our results of operations. We cannot predict what laws, regulations, interpretations and policies might be considered in the future, nor can we judge what impact, if any, the implementation of any of these proposals or changes might have on our business.

B.Business Overview

Industry

There are two main categories of passenger airlines that operate in the domestic and international Mexican market: (i) the traditional legacy network carriers, which include Grupo Aeroméxico, and (ii) the low-cost carriers, which include Interjet (which as of the date of this report is not operating) VivaAerobus and Volaris. The ULCC business model is a subset of the low-cost carrier market.

Legacy carriers offer scheduled flights to major domestic and international routes (directly or through membership in an alliance, such as Star Alliance, Oneworld and/or Skyteam) and serve numerous smaller cities. These carriers operate mainly through a “hub-and-spoke” network route system. This system concentrates most of an airline’s operations in a limited number of hub cities, serving other destinations in the system by providing one-stop or connecting service through hub airports to end destinations on the spokes. Such an arrangement permits travelers to fly from a given point of origin to more destinations without switching to another airline. Traditional legacy carriers typically have higher cost structures than low-cost carriers due to higher labor costs, flight crew and

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aircraft scheduling inefficiencies, concentration of operations in higher cost airports, and multiple classes of services. Other examples of legacy carriers in the Latin American market include Avianca, Copa, and LATAM.

Low-cost carriers typically fly direct, point-to-point flights, which tends to improve aircraft and crew scheduling efficiency. In addition, low-cost carriers often serve major markets through secondary, lower cost airports in the same regions as major population centers. Many low-cost carriers only provide a single class of service, thereby increasing the number of seats on each flight and avoiding the significant and incremental cost of offering premium-class services. Finally, low-cost carriers tend to operate fleets with only one or two aircraft families at most, in order to maximize the utilization of flight crews across the fleet, improve aircraft scheduling flexibility and minimize inventory and aircraft maintenance costs. The Mexican market, which has a large population of VFR and leisure travelers, has seen demand for these low-cost carriers expand in recent years.

In recent years, many traditional legacy network carriers globally have undergone significant financial restructuring, including ceasing operations or merging and consolidating with one another. These restructurings have allowed legacy carriers to reduce high labor costs, restructure debt, modify or terminate pension plans and generally reduce their cost structure. This has resulted in improved workforce flexibility and reduced costs while simultaneously improving product offerings similar to those of other low-cost carriers. Furthermore, many of the legacy carriers have made these improvements while still maintaining their expansive route networks, alliances and frequent flier programs.

One result of the restructuring of the network carriers is that the difference in the cost structures, and the competitive advantage previously enjoyed by low-cost airlines, has somewhat diminished. We believe that this trend has provided an opportunity for the introduction of the ULCC business model in Mexico as a subset of the more mature group of low-cost carriers.

The ULCC business model involves, among other things, intense focus on low cost, efficient asset utilization, unbundled revenue sources aside from the basic fare with multiple products and services offered for additional fees. Globally, ULCCs with highly successful business models include Allegiant, Frontier and Spirit in the United States, Ryanair and Wizz in Europe, and AirAsia in Asia.

ULCCs are able to achieve low-cost operations due to highly efficient and uniform fleets with high density seating and single aisle configurations. Additionally, ULCCs provide extremely low fares to customers in order to stimulate market demand and generate high aircraft utilization rates. With high aircraft utilization rates, ULCCs are able to generate substantial ancillary revenues through the offering of additional products and services, such as baggage fees, advanced seat selection, extra legroom, ticket change fees, and/or itinerary attachments such as hotels, airport transportation, and rental cars. ULCCs focus on VFR and leisure customers as opposed to business travelers. The ULCC product appeals to the cost-conscious customer because they are offered a low base-fare and are able to choose to pay for only the additional products and services they want to receive.

Economic and Demographic Trends

We believe the Mexican airline industry has strong potential for growth, given the country’s young demographics, the long-term trend for improving macroeconomic base and growing middle class, which will likely facilitate organic expansion of the airline sector. In addition, the national airline industry is relatively underpenetrated when compared to other countries of similar size and demographic characteristics. These elements combine at a time when the industry is under considerable attrition due in part from some of the legacy operators ceasing operations.

In terms of the macroeconomic environment, GDP growth in Mexico is expected to be 2.4% in 2022 and 2.9% in 2023 according to the Mexican Central Bank’s mid-point projections. These estimates are in line with the expected growth of U.S. GDP for 2022 of between 2.1% and 3.3% and are in line with the expected growth of U.S. GDP for 2023 of between 2.0% and 2.9%, according to the U.S. Federal Reserve. The GDP grew from 12.6 million in 2010 to 15.1 million in 2020, according to information derived from the report Cuantificando la Clase Media en México 2010-2020 of the INEGI. As of 2020, according to the Censo de Población y Vivienda 2020 of INEGI intercensal survey, approximately 30% of the Mexican population was under 18 years of age, which we believe benefits Volaris by providing a strong base of young, potential passengers in the future. This contrasts favorably with more mature aviation markets like the United States, where approximately 22.4% of the population is currently under 18 years of age. Additionally, the Mexican aviation market is currently underpenetrated, as evidenced by the number of trips per capita. On a global basis the World Bank estimates that as of 2019, there were, on average 0.6 annual trips per capita, whereas in Mexico the number was roughly a portion of that; this figure decreased form 0.6 in 2019 to 0.3 as of 2020 due to the COVID-19 pandemic.

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The Mexican low-cost airline industry competes with ground transportation alternatives, primarily long-distance bus companies. Given the limited passenger rail services in Mexico, travel by bus has traditionally been the only low-cost option for long-distance travel for a significant portion of the Mexican population. In 2020 (the latest year for which date is available as of the date of this annual report), bus companies transported over 1.87 billion passengers in Mexico, of which approximately 50.4 million were executive and luxury passenger segments, as measured in segments which include both long- (five hours or greater) and short-distance travel, according to the Mexican General Direction of Ground Transportation Authority. We believe that just a small shift of bus passengers to air travel would significantly increase the number of airline passengers. We believe that an increased shift in demand from bus to air travel in Mexico presents a significant opportunity as the macroeconomic environment improves and rising demographics take shape across the country. Furthermore, we believe that long-distance bus passengers will continue to shift to airplane travel when certain promotional fares are priced lower than bus fares for similar routes.

In the past the Mexican government has made a substantial investment in developing Mexico’s airport infrastructure. In 1998, the Mexican government created a program to open Mexico’s airports to private investments. Three private airport operators (Grupo Aeroportuario del Pacífico, S.A.B. de C.V., Grupo Aeroportuario del Centro Norte, S.A.B. de C.V. and Aeropuertos del Sureste de Mexico, S.A.B. de C.V.) were incorporated and granted 50-year concessions to operate airports in Mexico. In the first stage of the privatization process, the Mexican government sold a minority stake to strategic partners. The privatization process culminated in mid-2006, when the Mexican government sold the balance of its holdings to the public via initial public offerings.

The Mexican government still manages and operates the Mexico City International Airport, which it considers strategic, as well as other minor airports in the country. We believe that strong foundational infrastructure, and continued investment and development will result in significant growth potential for the Mexican airline market. In September 2014, the Mexican government announced the construction of a new international airport for Mexico City to replace the current international airport. In January 2019, the Mexican government announced the cancellation of the construction of the new Mexico City International Airport and introduced plans to invest in the expansion of the existing airport and is building a new airport in the Mexico City metropolitan area. In March 2022, the first fase of Felipe Angeles International Airport was finished and started operations.

Boeing estimates that passenger traffic growth for Latin America and the Caribbean will average 5.1% per year for the next 20 years. The fastest growth is expected to occur within intra-regional flows, supported by the continued growth of low-cost carrier networks. Continued growth of the middle class as well as rising income levels is expected to continue to drive long-term economic expansion in Latin America. Traffic between Central America and the Caribbean and North America is expected to remain strong, as North and Latin American LCCs continue to grow their service in this flow.

The Mexican aviation industry has undergone a significant transformation due to the emergence of low-cost carriers, including us and VivaAerobus, and the exit of eight carriers. Changes in the Mexican airline competitive environment have resulted in an important increase in the domestic market load factor for the remaining carriers. While load factor in Mexico has historically lagged more than that of developed markets, this positive trend will likely drive greater profitability among the remaining airlines in Mexico.

Market Environment

The airline industry is highly competitive. The principal competitive factors in the airline industry include fare pricing, total ticket price, flight schedules, aircraft type, passenger amenities, number of routes/destinations served from a city, customer service, safety record and reputation, code-sharing relationships, frequent flier programs and redemption opportunities. The airline industry is particularly susceptible to price discounting because once a flight is scheduled, airlines incur only nominal incremental costs to provide service to passengers occupying otherwise unsold seats. The expenses of a scheduled aircraft flight do not vary significantly with the number of passengers carried, and, as a result, a relatively small change in the number of passengers or in pricing can have a disproportionate effect on an airline’s operating and financial results. Price competition occurs on a market-by-market basis through price discounts, changes in pricing structures, fare matching, targeted promotions and frequent flier initiatives. Airlines typically use discount fares and other promotions to stimulate traffic during normally slower travel periods to generate cash flow and to maximize revenue per ASM. The prevalence of discount fares can be particularly acute when an airline has excess capacity and is under financial pressure to sell tickets.

In Mexico, the United States, Central America and South America, the scheduled passenger service market consists of three principal groups of travelers: business travelers, leisure travelers, and travelers visiting friends and relatives, or VFR. Leisure travelers and VFR travelers typically place most of their emphasis on lower fares, whereas business travelers typically place a high emphasis on

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flight frequency, scheduling flexibility, breadth of network and service enhancements, including loyalty programs and airport lounges, as well as price.

VFR and leisure passengers travel for a number of reasons, including social visits and vacation travel. We believe that VFR and leisure traffic are the most important components of the traffic in the markets we target and serve and are important contributors to our non-passenger revenue production. We believe that VFR and leisure passengers represent a significant percentage of our total passenger volume. As part of our route development strategy, we target markets that will likely appeal to VFR and leisure travels at price points that were previously not available. This strategy allows us to stimulate demand in new markets by encouraging travel by VFR and leisure travelers.

Domestic passenger volumes have grown in Mexico by a CAGR of 3.3% and international volumes have increased by a CAGR of 1.8% from 2007 to 2021 according to the AFAC. The following table sets forth the historical passenger volumes on international and domestic routes in Mexico from 2007 to 2021:

Passenger Volumes(1)

2007

2008

2009

2010

2011

    

2012

    

2013

    

2014

    

2015

    

2016

    

2017

    

2018

    

2019

    

2020

    

2021

(millions of segment passengers)

    

International

 

27.2

27.9

24.2

25.8

26.8

    

28.5

30.9

33.6

37.5

40.5

45.0

47.6

48.8

20.1

35.8

% growth increased)

 

(0.5)

%  

2.5

%  

(13.2)

%  

6.3

%  

4.1

%  

6.5

%  

8.1

%  

8.8

%  

11.7

%  

7.9

%  

11.1

%  

5.8

%  

2.4

%  

(58.8)

%  

78.2

%

Domestic

 

27.4

27.6

24.4

24.5

25.6

28.2

30.6

33.0

37.3

41.9

45.4

49.7

53.7

28.3

44.4

% growth increased)

 

23.6

%  

0.9

%  

(11.6)

%  

0.3

%  

3.9

%  

10.2

%  

8.6

%  

7.7

%  

13.0

%  

12.5

%  

8.2

%  

9.5

%  

8.1

%  

(47.4)

%  

57.2

%

Total

 

54.6

55.5

48.6

50.3

52.4

56.7

61.5

66.6

74.8

82.4

90.4

97.3

102.5

48.4

80.2

% growth increased)

 

10.3

%  

1.8

%  

(12.4)

%  

3.5

%  

4.0

%  

8.3

%  

8.3

%  

8.3

%  

12.3

%  

10.2

%  

9.6

%  

7.7

%  

5.3

%  

(52.8)

%  

65.9

%

Source: AFAC

Our international growth strategy has focused on targeting markets in the United States with large Mexican and Latin-American communities in order to stimulate VFR demand and leisure traffic in those markets. Approximately 82% of international passengers in Mexico fly to the United States, making the United States the largest international destination for air passengers in Mexico. All of the major U.S. legacy carriers fly to and from Mexico, but at a higher cost than low-cost carriers. We have learned that many Mexicans in the United States purchase airline tickets for family members living in Mexico to fly to the United States to visit. For this reason, we focus our international routes on U.S. cities with significant Mexican and Mexican-American communities. These cities are generally located in and near to counties with Hispanic populations of over one million as of 2020; including Los Angeles (Los Angeles County, 4.9 million), Houston (Harris County, 2.0 million), Miami (Miami-Dade County, 1.9 million), Phoenix (Maricopa County, 1.4 million), Chicago (Cook County, 1.4 million); Ontario, California (Riverside County, 1.2 million) and Dallas (Dallas County, 1.0 million), according to PEW Research Hispanic Center based on U.S. Census Bureau data. In recent years, we have also been growing our operations in Central and South America.

In 2021, the Mexican ULCCs (VivaAerobus and Volaris) together maintained 69.5% of the domestic market, based on passenger flight segments, according to the AFAC. The following table sets forth the historical market shares on domestic routes, based on passenger flight segments, of each major market participant for each of the periods indicated:

Market Share(1)

Domestic

    

2007

2008

2009

2010

2011

    

2012

    

2013

    

2014

    

2015

    

2016

    

2017

    

2018

    

2019

    

2020

    

2021

Volaris

 

7.94

%  

12.16

%  

12.82

%  

14.79

%  

17.96

%  

20.39

%  

23.04

%  

23.23

%  

24.67

%  

27.42

%  

27.40

%  

28.31

%  

31.23

%  

38.34

%  

41.22

%

Grupo Aeroméxico

 

28.58

%  

28.01

%  

32.28

%  

36.20

%  

40.17

%  

37.78

%  

35.77

%  

36.04

%  

33.74

%  

31.13

%  

28.98

%  

27.59

%  

24.21

%  

25.31

%  

27.48

%

Grupo Mexicana(2)

 

24.07

%  

24.05

%  

27.16

%  

18.55

%  

Interjet(3)

 

7.04

%  

10.83

%  

12.71

%  

16.35

%  

24.78

%  

23.83

%  

24.37

%  

23.69

%  

24.53

%  

21.62

%  

21.18

%  

20.48

%  

19.69

%  

8.75

%  

Viva Aerobus

 

4.44

%  

4.83

%  

5.83

%  

8.85

%  

11.49

%  

12.49

%  

12.19

%  

11.81

%  

11.70

%  

14.26

%  

16.87

%  

18.35

%  

20.12

%  

24.41

%  

28.31

%

Source: AFAC

(1)Market share is obtained by dividing each airline’s number of passengers by the total number of passengers for all airlines for the period indicated.
(2)Ceased operations in August 2010.
(3)Suspended operations in December 2020.

The airline industry in Mexico has seen sharp attrition, with the exit of eight airlines since 2007, including the bankruptcy of Grupo Mexicana in April 2014 and the suspension of operations of Interjet since 2020. This allowed us to further expand our international service offering in a very short timeframe.

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The following table sets forth the historical market shares on international routes between Mexico, the United States and other countries, based on passenger flight segments, of key Mexican industry participants for each of the periods indicated:

Market Share(1)

International

    

2007

2008

2009

2010

2011

    

2012

    

2013

    

2014

    

2015

    

2016

    

2017

    

2018

    

2019

    

2020

    

2021

 

Volaris

 

2.92

%  

9.38

%  

21.11

%  

21.45

%  

20.42

%  

21.24

%  

22.75

%  

24.70

%  

22.80

%  

19.63

%  

21.83

%  

35.96

%  

39.20

%

Grupo Aeroméxico

 

34.05

%  

31.73

%  

31.06

%  

39.83

%  

75.73

%  

67.24

%  

64.63

%  

66.05

%  

61.67

%  

56.82

%  

55.65

%  

53.20

%  

45.58

%  

37.28

%  

41.59

%

Grupo Mexicana(2)

 

63.85

%  

66.08

%  

65.36

%  

49.94

%  

    

Interjet(3)

 

0.10

%  

0.28

%  

1.51

%  

8.80

%  

13.42

%  

11.09

%  

13.69

%  

17.60

%  

20.72

%  

24.57

%  

28.65

%  

17.93

%  

Viva Aerobus

 

0.85

%  

0.43

%  

0.84

%  

1.54

%  

2.13

%  

0.81

%  

0.91

%  

1.52

%  

0.55

%  

0.64

%  

2.46

%  

3.60

%  

8.08

%  

18.11

%

Source: AFAC

(1)Market share is obtained by dividing each Mexican airline’s number of passengers by the total number of passengers for all Mexican airlines for the period indicated.
(2)Ceased operation in August 2010.
(3)Suspended operations in December 2020.

We have been able to grow our international market share substantially over the past five years even with significant competition from leading U.S. carriers including United, American, Alaska Air, and Delta. As of December 31, 2021, we were the fourth largest international carrier in terms of passenger flight segments out of all airlines flying internationally to and from Mexico. We have been able to grow our international market share and our strategy to target and stimulate markets in the United States with large Mexican and Mexican-American communities.

In terms of both domestic and international ticketed passengers, our total passenger volume increased at a CAGR of 22.91 % from 2006 to 2021, with approximately 0.9 million booked passengers in 2006 and 24.4 million booked passengers in 2021.

Our Business Model

Our business model is based on that of other ULCCs operating elsewhere in the world, such as Allegiant, Frontier and Spirit in the United States, Ryanair and Wizz in Europe and AirAsia in Asia. We utilize our ULCC business model and efficient operations to offer low base fares and to stimulate demand while aiming to provide suitable and efficient customer service. Our unbundled pricing strategy allows us to provide low base fares and enables our passengers to select and pay for a range of optional products and services for additional fees. We target VFR, cost-conscious business people and leisure travelers in Mexico and to select destinations in the United States, Central and South America.

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-passenger and total revenue. We plan to continue to use low base fares to stimulate additional passenger demand, shift bus passengers to air travel and increase our load factor. We believe a small percentage shift of bus passengers to air travel would dramatically increase the number of airline passengers. Higher load factors help us generate additional non-passenger and total revenue, which in turn, allow us to further lower base fares and stimulate new demand.

We have a relentless focus on low costs as part of our organizational culture. We are the lowest cost airline carrier in Latin America, based on CASM, compared to the other Latin American publicly traded companies. We are also one of the lowest cost carrier in our target markets in Mexico and the United States, compared to our target market competitors, according to public information available from such competitors. We are able to keep our costs low due to our efficient and uniform fleet, high asset utilization, our emphasis on direct sales and distribution and our variable, performance-based compensation structure.

We were established and are operated to achieve the following goals: (i) to create a profitable and sustainable business model; (ii) to successfully compete by creating structural advantages over other carriers serving Mexico through our ULCC business model; (iii) to provide affordable air travel with a suitable and efficient 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 2021 we had the lowest cost structure of any of the other Latin American publicly traded airlines, with CASM of Ps. 130.9 cents (U.S. $6.45 cents), compared to Azul at U.S. $9.44 cents, Copa at U.S. $9.10 cents, Gol at U.S. $12.39 cents, Grupo Aeroméxico at U.S. $13.31 cents and LATAM at U.S. $14.83 cents. We also have lower costs than our U.S.-based publicly traded target market competitors, including Alaska Air at U.S. $10.47 cents, American at U.S. $14.42 cents, Delta

52

at U.S. $14.40 cents, Jet Blue at U.S. $11.30 cents, Southwest Airlines at U.S. $10.66 cents, Frontier at U.S. $8.10 cents, Spirit at U.S. $8.07 cents, Allegiant at U.S. $8.26 cents and United at U.S. $14.36 cents in 2021, according to publicly available financial information. We achieve our low operating costs in large part due to:

Efficient and Uniform Fleet. We operate a uniform and efficient fleet of Airbus A320 family aircraft, which is one of the youngest fleet in the Americas, with an average aircraft age of 5.4 years as of December 31, 2021.

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 12.53 block hours per day in 2021.
Direct Sales Distribution. We encourage our customers to purchase tickets via our website, mobile app, call center or airport service desks as these distribution channels are the lowest cost to us. We sell 82.7% of our tickets through these channels. We do not use global distribution system, or GDS.
Variable, Performance-Based Compensation Structure. We compensate our employees on the basis of their performance, and we reward them for the contribution they make to the success of the company rather than their seniority.

Ancillary Revenue Generation. We have been able to grow our non-passenger revenue by allowing our passengers to choose what additional products and services they purchase and use. Thanks to our “You Decide” (“Tú Decides”) strategy, we have increased average non-passenger revenue per passenger flight segment from approximately U.S. $9.61 in 2010 to U.S.$39.20 in 2021 by, among other things:

charging for excess baggage;
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 revenue 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 this demographic represents the highest potential for growth in our target markets. By offering low promotional fares, we stimulate demand for VFR and leisure travel, and attract new customers, including those who previously may have only traveled by bus. We use our yield management system to set prices based on the time of booking.

We regularly manage yield and load factor, including through targeted promotional fares that can be as low as Ps.349 (U.S.$44.99) or Ps.299 (U.S.$34.99) for Vclub members. We have found that many Mexicans and Mexican Americans living in the United States buy airline tickets for themselves and their family members in Mexico. In addition, we have over 93,000 points of payment throughout Mexico, the United States, Guatemala, El Salvador, Costa Rica, Peru and Colombia 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.

53

Disciplined Approach to Market and Route Selection. We select target markets and routes where we believe we can achieve profitability within a reasonable timeframe, and we only continue operating on routes where we can achieve and maintain our target level of profitability. When developing our route network, we focus on gaining market share on routes that have been underserved or are served primarily by higher cost airlines where we have a competitive cost advantage. We thereby stimulate new demand with low base fares and attempt to shift market share from incumbent operators. We have developed a profitable route network, on an annual basis based on the results of our most recently completed fiscal year and built a leading market share in several of our markets. As of December 31, 2021, we had more than 50% passenger market share in 117 of our 183 routes. As of December 31, 2021 we faced no competition from any other carrier on over 40% of our routes. In 2021, 32.3% of our passenger revenues derived from our U.S. routes and 26.9% of our ASMs were attributed to U.S. routes.

Market Leading Efficiency and Performance. We believe we are one of the most efficient airline carriers in Latin America. In 2021, we achieved an average passenger load factor of 84.7% and an average aircraft utilization rate of 12.53 block hours per day with a standard turnaround time between flights of approximately 64 minutes. For our fleet type, our average aircraft utilization rate of 10.85 flight hours per day was among the highest worldwide and was 53% higher than the industry average of 5.66 flight hours per day for all Airbus A319 aircraft, 75% higher than the 6.33 flight hours per day for all Airbus A320 aircraft and 50% higher than the 6.8 flight hours per day for all Airbus A321 aircraft, according to information for the year ended December 31, 2021 available from Airbus. The high-density, single-class seating configurations on our aircraft allow us to increase ASMs and reduce fixed costs per seat as compared to a lower density configuration flown by certain of our competitors. In addition, we strive for market-leading operational performance, with a 77.3% on-time performance rate, 97.5% flight completion rate and a mishandled baggage rate of only 0.5 bags per 1,000 passengers in 2021.

Brand Recognition with a Fast Growing Fan Base. We believe that we have developed strong brand recognition due to our focus on delivering good value and a positive traveling experience to our customers. As of December 31, 2021, we had approximately 4.4 million fans on Facebook and 2.0 million followers on Twitter, both of which we primarily use for marketing, customer service and promotion. Our social media reach has been a very low cost, yet effective, marketing tool for us and has afforded us the capability to develop highly effective, targeted marketing promotions on a very short notice. We have also established various programs to make air travel more inviting for first time travelers and other passengers who may desire extra services, such as an unaccompanied senior program. On April 16, 2021, we received the Famous Brand Declaration from the Mexican Institute of Industrial Property, or IMPI, for the “Volaris” brand.

Balance Sheet Positioned for Growth. We have a low level of financial debt, since we have principally financed our operations through equity and operating cash flows, and we have only used operating leases for our aircraft. We believe that our strong financial position enables us to prudently finance the emerging growth opportunities in our markets and to defend our existing network from our competitors. As of December 31, 2021, we had a balance of Ps.15.1 billion in unrestricted cash and cash equivalents, representing 34% of our last twelve months operating revenues. As of December 31, 2021, our cash, cash equivalents and restricted cash were Ps.15.2 billion. Additionally, at December 31, 2021, our credit lines totaled Ps.9.9 billion, of which Ps.6.9 billion (Ps.0.2 million were undrawn) were related to financial debt and Ps.3.0 billion were related to letters of credit (of which Ps.0.5 billion were undrawn).

Strong Company Culture, Experienced Management Team and Principal Shareholders. We have developed a strong company culture among our employees that is focused on safety, meritocracy, efficiency and profitability, with a significant component of performance-based variable compensation. Our management team has been assembled with experienced executives in their respective fields, including in the aviation, sales and marketing, finance or IT industries in Latin America. In addition, our principal shareholders have extensive prior experience in funding, establishing and leading airline carriers around the world. Their expertise has helped us develop our ULCC business model and allowed us to benefit from their procurement power and relationships with key vendors.

Our Growth Strategy

Our goal is to continue to grow profitability on an annual basis and maintain our leadership position in the Mexican aviation market by operating our ULCC business model and focusing on VFR, cost-conscious business people and leisure travelers. The key elements of our growth strategy include:

Remain the ULCC of Choice. We believe that by deploying additional cost-efficient Airbus A320neo and A321neo aircraft with higher seat density, spreading our low fixed cost infrastructure over a larger scale of operations, outsourcing operating functions

54

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 suitable and efficient travel experience to our customers across our expanding operations in Mexico, the United States, Central America and South America.

Grow Non-passenger Revenue while Maintaining Low Base Fare to Stimulate Demand. We intend to increase our non-passenger revenues by further unbundling our fare structure and by offering our passengers new and innovative products and services. Through our multiple points of interaction with our customers during each stage of their travel, from ticket purchase through flight and post-trip, we have the opportunity to offer third party products, such as hotel rooms, car rentals and trip interruption insurance, on which we receive commissions. In addition, we sell in-flight products and we plan to introduce and expand upon products and services that are unrelated to passenger travel. We provide a membership-based ultra-low-fare subscription service called V-Club which had approximately 654,000 members as of December 31, 2021. The number of V-Club members increased by 65% in 2021 compared to 2020. In 2021 we introduced a duo membership of U.S. 49.99 and an exclusive V-Club page where the customer can purchase any of these memberships on a subscription basis and choose whether they want an automatic monthly or annual fee according to their preferences. We also continue to expand the cargo transportation services we provide on our aircraft. As we broaden our ancillary products and services and increase our non-passenger revenue, we believe that we will be able to further lower base fares and continue to stimulate demand.

Gain Additional Market Share by Stimulating Demand in our Existing Markets. We plan to continue to grow our existing markets by adding routes that connect cities in which we currently have operations and by adding capacity on existing routes where we believe we can continue to stimulate demand. We also intend to continue to aggressively target long-distance bus passengers who we believe may shift to air travel. We set certain promotional fares at prices lower than bus fares for similar routes, and we believe this will encourage bus travelers to switch to air travel.

Continue our Disciplined Fleet Growth. As of the date of this annual report, we have firm commitments for 136 Airbus A320 family aircraft equipped with sharklet technology that will be delivered over the next eight years, 132 from the Company´s purchase agreement with Airbus and four from lessors order book, including 35 of the next generation Airbus A320neo and 101 of the next generation Airbus A321neo, the delivery of which commenced in 2016 and 2018, respectively. During 2021, we incorporated 15 A320neo into our fleet. In December 2017, we entered into an agreement with Airbus to purchase 80 aircraft, which we are committed to receive from 2022 to 2026. The new order includes 46 A320neo and 34 A321neo. Under such agreement and prior to the delivery of each aircraft, we agreed to make pre-delivery payments, which shall be calculated based on the reference price of each aircraft, and following a formula established for such purpose in the agreement. In November 2018, we amended the agreement with Airbus to reschedule the remaining 26 aircraft deliveries between 2019 and 2022. In July 2020, we amended the agreement with Airbus to reschedule the delivery of 80 aircraft between 2023 and 2028. In October 2020, we amended the agreement with Airbus to reschedule 18 aircraft deliveries between 2020 and 2022. In November 2021, the Company entered into a new amendment to the purchase agreement with Airbus to purchase 39 additional A320 family NEO aircraft which we are committed to receive between 2023 and 2029, under this amendment we have the option to purchase 25 additional A320 family NEO aircraft.

Our fleet have reached 105 aircraft as of the date of this annual report. We believe that a disciplined ramp-up in young and efficient aircraft as our market share expands reduces our exposure to market conditions. We intend to maintain our commitment to a common fleet type because we believe it is the most efficient option for our markets and operations.

Grow Passenger Volume by Profitably Establishing New Routes. We believe our focus on low fares and customer service will stimulate growth in overpriced, underserved and inefficient new markets. We will continue our disciplined approach to domestic and international market entry by using our rigorous selection process where we identify and survey possible target markets that have the potential to be profitable within our business model.

For example, in 2021, we added 6 new routes, including one domestic route (Cancun - Mexicali) and 5 international routes (Bogota - Mexico, Bogota - Cancun, Mexico City – San Salvador, Cancun – San Salvador and San Salvador – San Pedro Sula). 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 209 routes within Mexico serving markets in excess of 250,000 inhabitants and other leisure destinations, and that have stage lengths of at least 180 miles, and approximately 117 routes internationally that have stage lengths of at least 410 miles.

55

Our Operations

Passenger Revenues

Passenger revenues accounted for Ps.43.3 billion or 97% of our total operating revenues in 2021. VFR traffic makes up the largest component of our customers, and we believe our VFR customers are the most cost-conscious and time/schedule flexible of all of our travelers. Our VFR market tends to complement our leisure-driven market from both a seasonal and week-day perspective. VFR traffic is strongest during the summer, Christmas and New Year season, followed by Easter. Leisure traffic makes up the second largest component of our customers. This segment responds well to demand stimulation based on low fares. Leisure traffic tends to coincide with holidays, school schedules and cultural events with peaks in July and August and again in December and January. Cost-conscious business people make up the third largest component of our customers. Although business travel can be cyclical with the economy, this segment tends to travel steadily throughout the year regardless of the season. We do not operate a frequent flier program.

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

We generate fees from V-Club, our individual annual membership subscription service, by charging U.S. $29.99 or a group annual membership of U.S. $149.99. V-Club subscriptions accounted for 0.5% of our other passenger revenues in 2021.

Members of the V-Club have exclusive access to the lowest fares and promotions through our website and mobile app. We also generate revenues from our affinity credit card from multiple revenue streams including electronic credit redemptions earned through credit card purchases. Revenue from the Volaris affinity credit card accounted for 2.0% of our non-passenger revenues as of December 31, 2021. As of December 31, 2021, we had approximately 654,000 V-Club members and 366,000 affinity credit card holders.

Non-Passenger Revenues

Our non-passenger revenues include income generated from (i) other non-passenger revenues and (ii) cargo services. In 2021, we derived Ps.1.4 billion, or 3% of our total operating revenues from these sources.

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

Revenues from cargo services are recognized when the cargo transportation is provided (upon delivery of the cargo to the destination).

The typical fees for advance seat selection, extra legroom, carriage of sports equipment, pets and ticket changes are approximately U.S. $3.99 to U.S. $29.99, U.S. $13.99 to U.S. $49.99, U.S. $90.00 to U.S. $210.00, U.S. $100.00 to U.S. $190.00 and U.S. $85.00 to U.S. $110.00, respectively and we generate such fees in Mexico, the United States, Central and South America. We also make available trip insurance commercialized by third parties through our website.

We make efficient use of extra capacity in our aircraft by carrying cargo on our passenger flights. We offer cargo transportation services on all domestic routes. We outsourced all ground cargo handling services, including storage, to several third-party providers and the related cost of such services are paid by our cargo customers. We offer competitive rates and our service includes reception, check-in, shipping and delivery to the final destination.

We also offer charter services, which do not represent a significant part of our total operating revenues.

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Route Network

We currently serve 72 cities throughout Mexico, the United States, Central and South America and operate up to 500 average daily segments on routes that connect 44 cities in Mexico, including highly demanded destinations such as Cancun, Guadalajara, Mexico City, Monterrey and Tijuana, and 28 cities in the United States, Central and South America, including: Charlotte, Chicago, Dallas, Denver, Fresno, Houston, Las Vegas, Los Angeles, Miami, New York, Oakland, Ontario, Orlando, Phoenix, Portland, Reno, Sacramento, San Antonio, San Jose (California), Seattle, Washington D.C.,  San Jose (Costa Rica), Guatemala City (Guatemala), San Salvador (El Salvador), San Pedro Sula (Honduras), Bogota (Colombia) and Lima (Peru). Our route network is designed to provide service within Mexico and between Mexico and cities in the United States with large Mexican and Mexican American communities, primarily in California.

As part of our point-to-point strategy and route network, we generally offer direct flights between cities with high traffic volumes. We believe this model of scheduling allows us to more frequently serve a greater number of cities and to generate higher load factors, enabling us to increase aircraft utilization and providing us with greater flexibility in our scheduling options.

We schedule flights timed to arrive at each destination and depart a short time later in order to minimize turnaround times. Many of our evening flights are intended to provide red-eye travel for the longer routes we cover and to appeal to customers who want to save on lodging expenses. Our day flights allow us to maximize our fleet utilization and utilize the employees at our airports efficiently.

The map below sets forth the destinations we currently serve.

Graphic

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Sales, Distribution, Marketing and Advertising

Sales and Distribution. We currently sell our product through four primary distribution channels: our website, our mobile app, our call center, airports and third parties such as travel agents. We use our website as the primary platform for ticket sales. After our website and mobile app, our distribution sources are our outsourced call center, third-party travel agents and airport counter sales. The following table sets forth the approximate percentage of our ticket sales in 2021 per distribution source and applicable fees:

Distribution Source

    

% of tickets Sold in 2021

    

Fee in pesos(1)

Website and mobile app

 

78.1

%  

$

0

Call center

 

3.3

%  

$

300

Third-party travel agents

 

17.3

%  

$

169

Airport counters

 

1.3

%  

$

0

(1)Standard fee charged per customer.

Sales through our website and mobile app represent our lowest cost distribution channel, and it is the channel through which we offer our lowest fares. For all other channels, we pass the additional costs associated with them through to our customers.

Our passengers may pay for their tickets at the time of booking on our website or through our call center by credit or debit card, or within 24 hours in cash at one of the various points of payment, located at several different businesses vendors we have made available. Approximately 93.3% of our sales are paid by credit and debit card and 6.7% by cash and other forms of payment. We have entered into agreements with Cadena Comercial OXXO, S.A. de C.V., and certain banks in Mexico, the United States, Guatemala, El Salvador, Costa Rica, Peru and Colombia to provide our customers with the possibility to pay in cash for their tickets at over 93,000 points of payment. These agreements are generally entered into for one- or two-year periods, are subject to termination upon short notice and are renewable by mutual agreement. In 2021, we expensed an aggregate of Ps.926 million in commissions, a portion of the cost of which was transferred to the customers using this service.

We have entered into an agreement with One Link, S.A. de C.V., or One Link, for the services of call center. Pursuant to this agreement, One Link receives calls from our customers to provide them with information about our fares, schedules and availability among others. The agreement with One Link expires in August 2025.

We have signed agreements with Navitaire LLC and Jeppessen Systems AB, major suppliers of IT solutions in the global airline industry. Through these agreements we are provided with technology systems that allow us to conduct our operations.

Pursuant to our agreement with Navitaire LLC, they provide us with hosted reservation services, including reservations, revenue accounting, and operations management and recovery, as well as certain services related thereto. This agreement has an initial term of ten years and has been extended until March 2025, unless it is terminated with prior notice subject to certain conditions.

The foregoing description of the terms of the agreement with Navitaire LLC is intended as a summary only and is qualified in its entirety by reference to the copy filed as an exhibit to this annual report.

Marketing and Advertising. Our marketing and advertising activities include the use of the Internet, television, radio and billboards. We focus on direct consumer marketing for our markets, by offering promotional fares and maintaining a strong presence in digital media, such as Facebook, Twitter, Google, Instagram and YouTube. As of December 31, 2021, we had approximately 4.4 million fans on Facebook and 2.0 million followers on Twitter, which we primarily use for marketing and promotion.

We reach our customers directly by holding promotional events that build brand recognition. We also advertise on billboards, in venues that our core consumers frequently attend, radio, television and shopping malls. We have Internet promotions directed at current customers, who can register on our website. In addition, we send emails with promotions and advertisement to approximately 1.7 million e-mail addresses on a weekly basis. We strive to have the highest marketing impact at the lowest cost. We recently launched a new marketing campaign, denominated “Te queremos volando” that was designed to focus on the middle to high income traveler and “Agárrale el modo a volar” that was designed to focus on the low to middle income traveler, with efforts allocated in new channels and to accelerate the substitution of long-distance bus travel to air travel.

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We have a membership-based ultra-low-fare subscription service called V-Club which had approximately 654,000 members as of December 31, 2021. The V-Club is an annual subscription-based service that allows members exclusive access to the lowest fares on offer and discounted baggage fees. V-Club members pay a small annual fee for first access to offerings of low fares. The membership provides benefits such as guaranteed exclusive, member-only fare sales (at least once every six weeks) and private offers on hotels, rental cars and other travel necessities. The number of V-Club members increased by 65% in 2021 compared to 2020.

The Volaris affinity credit card, Volaris INVEX, provides holders with cash back on Volaris-related purchases and grants priority boarding, additional baggage, allowances, deferred payment on purchases with no interest, a 15% discount on the purchase of on-board menu items, access to the MasterCard Elite lounge at the Mexico City International Airport. We receive a fee from all purchases made with the card. In March 2015, we launched the Volaris INVEX 2.0 credit card with additional benefits, such as an individual V-Club and LoungeKey membership. In October 2017, we launched the Volaris INVEX 0 credit card, which has no annual fee.

Pricing and Yield Management

Our emphasis on keeping our operating costs low has allowed us to set low base fares and ancillary revenues while achieving and increasing profitability. We have designed our fare structure to balance our load factors and yields in a way that we believe will generate the highest revenue per block hour on our flights. Most of our seats are sold in the low and mid fare ranges. With the exception of special offers and promotions, we do not have advance purchase restrictions, minimum stays or any other fare restrictions, such as required Saturday night stays. For some of our flights, we set very low discounted base fares based upon the fares charged by bus lines for travel to the same destinations in order to increase our customer base by adding customers who have previously used other forms of transportation.

On the international market, our base fare (“basic”) only includes one personal item, and the possibility of adding luggage and other services with a charge. In the case of the domestic market, our base fare (“basic”) includes 2 carry ons, and the possibility of adding extra weight and other services with a charge. Additions can be made directly by choosing other types of fares (“classic,” “plus”) or adding a-la-carte services. Our fares are non-refundable and subject to change fees. In addition to our base fare, customers can choose a variety of additional products and services to customize their travel experience. These include options like pre-selecting a higher baggage allowance or preferred seating, as well as purchasing food, beverages and other products on board. Additional products and services can be purchased at different points in time, including at the time of purchase, before the flight and at the airport. We increase the prices of these products and services the closer the customer purchases them to the departure date.

We use yield management in an effort to maximize revenues per flight, which is also linked to our route and schedule planning and our sales and distribution methods. Yield management is an integrated set of business procedures and mathematical models that provide us with the ability to understand markets, anticipate customer behavior and respond quickly to opportunities. The number of seats we offer at each fare class in each market is based on a continuous process of analysis and forecasting. Past booking history, seasonality, the effects of competition and current booking trends are used to forecast demand. Current fares and knowledge of upcoming events at destinations we serve that we believe will affect traffic volumes are also included in our forecasting model to arrive at an optimal seat allocation for our fares on specific routes. We use a combination of approaches, taking into account yields and flight load factors, depending on the characteristics of the markets served, to design a strategy to achieve the best possible TRASM by balancing the average fare charged and ancillary services sold against the corresponding effect on our load factors.

Customer Service

We are committed to providing our customers with value for their money and on-time and reliable performance. We believe that our low fares initially attract customers and that our exceptional service strengthens customer loyalty and enhances our brand recognition through word-of-mouth as our customers tell others about their experience.

We hire employees who we believe will treat customers in a courteous and friendly manner, and emphasize customer service during their training and as a general part of our company culture. We call our employees ambassadors. We also focus on other details that can improve the travel experience, including on-line check-in and seat assignment options, e-ticket travel, single-class seating, modern aircraft interiors and discounted shuttle services between certain airports and drop-off zones on certain routes. We provide personalized in-cabin support for customers who need it and the option of special assistance for unaccompanied minors and seniors. We believe our customer relationship management has been a key element of our success.

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We are committed to compensating our employees on the basis of their performance, rewarding them for the contribution that they make to our success instead of seniority. We base part of our employee compensation on customer service, which is measured through a net promoter score obtained from customer interviews. In 2021, we conducted Net Promoter Score (NPS) surveys during the first and fourth quarters with an average of 38,019 monthly responses; as we expand our operations, this number will likely increase.

We understand that efficient and punctual operations are important to our customers, and we intend to continue to excel in operational performance. The following table sets forth certain performance-related customer service measures for the years ended 2019, 2020 and 2021:

    

2019

    

2020

    

2021

On-time performance(1)

 

79.2

%  

87.9

%  

77.3

%

Completion factor(2)

 

97.6

%  

94.6

%  

97.5

%

Mishandled baggage(3)

 

1.0

0.6

0.5

(1)Percentage of our scheduled flights that were operated by us and that arrived on time (within 15 minutes of the scheduled arrival time).
(2)Percentage of our scheduled flights that were operated by us, whether or not delayed (i.e., not cancelled).
(3)Our incidence of delayed, mishandled or lost baggage per 1,000 passengers.

Competition

The airline industry is highly competitive. The principal competitive factors in the airline industry are fare pricing, total price (including ancillary services), flight schedules, aircraft type, passenger amenities, number of routes served from a city, customer service, safety record and reputation, code sharing relationships, and frequent flier programs and redemption opportunities. Our current and potential competitors include traditional network airlines, low-cost carriers, regional airlines and new entrant airlines. We typically compete in markets served by legacy carriers and other low-cost carriers, and, to a lesser extent, regional airlines. Some of our current or future competitors may have greater liquidity and access to capital, and serve more routes than we do.

Our principal competitive advantages are our low base fares and our focus on VFR travelers, leisure travelers and cost-conscious business people. These low base fares are facilitated by our low CASM, which is the lowest among the other Latin American publicly traded airlines. In 2021, our CASM was Ps.130.9 cents (U.S. $6.45 cents), compared to an average CASM of U.S. $12.51 cents for the other Latin American publicly traded airlines (Azul, Copa, Gol, Grupo Aeroméxico and LATAM). We also have lower costs than our U.S.-based publicly traded target market competitors, including Alaska Air, American, Delta, Jet Blue, Southwest Airlines, Frontier, Spirit, Allegiant and United, which had an average CASM of U.S. $12.87 cents in 2021.

Our principal competitors in Mexico are Grupo Aeroméxico and VivaAerobus. Internationally, we compete with Grupo Aeroméxico, Viva Aerobus and many U.S.-based carriers, including Alaska Air, American, Delta and United. In the Mexico — Central America market our principal competitors are Grupo Aeroméxico and Avianca, while in the Central America — U.S. market our principal competitors are Avianca and Delta. For the Mexico — South America market our principal competitors are Grupo Aeroméxico, Viva Aerobus and LATAM. Our competitors and the Mexican airline industry as a whole have also been significantly impacted by the COVID-19 pandemic.

In 2021, the Mexican low-cost carriers (including us) combined had 69.5% of the domestic market based on passenger flight segments. We had 41.2% of the domestic market which placed us first, according to AFAC. As of December 31, 2021, the number of commercial aircraft in service in Mexico increased to 310, as compared to 275 as of December 31, 2020, according to AFAC. This 13% increase was comprised mainly of narrow body aircraft, including 79 Airbus A320s, 51 Boeing 737s, and 16 Airbus A321s. On June 30, 2020, Grupo Aeroméxico, our largest competitor by domestic and international market share in 2019, announced that it was filing for Chapter 11 bankruptcy protection in the United States. On March 17, 2022 Grupo Aeromexico announced that it had concluded its restructuring process. As of December 31, 2021, AFAC reports indicate that Grupo Aeroméxico’s subsidiaries Aeroméxico and Aeroméxico Connect had fleets of 79 and 42 aircraft, respectively, as compared to 58 and 44, respectively, as of December 31, 2020. In addition, Interjet, our second largest competitor by international market share in 2019, has been unable to resume international flights since suspending the routes in March 2020. Interjet’s fleet decreased by 100% in 2021, from three aircraft as of December 31, 2020 to zero as of December��31, 2021, according to information published by the AFAC. Interjet has not operated any domestic flights since December 2020. According to media reports, on April 26, 2021, Interjet announced that its shareholders approved the filing of a reorganization process (concurso mercantil) in Mexico. VivaAerobus, our second largest competitor by

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domestic market share in 2020, has increased their fleet from 43 as of December 31, 2020 to 55 as of December 31, 2021. In addition to these changes in fleet size, our market share has also increased. As of December 2021, our domestic market share had increased 3.24 percentage points to 39% and our international market share had decreased 3 percentage points to 11%, in each case as compared to our market shares as of December 2020.

Fleet

Since we began operations in March 2006, we have increased our fleet from four to 101 aircraft as of December 31, 2021.

As of December 31, 2021, we flew only Airbus A320 family aircraft, which provides us with significant operational and cost advantages compared to airlines that operate multiple fleet types. The Airbus A320 family is based on a common aircraft type with the same cabin cross-section, and virtually the same systems, cockpit controls, operating and maintenance procedures, and pilot type rating. The Airbus A320 family aircraft are fuel efficient and allow flight crews to be interchangeable across all of our aircraft while decreasing training, maintenance, spare parts inventory and other operational costs. Due to the commonality among the Airbus A320 family, we can retain the benefits of a fleet comprised of a single type of aircraft while still having the flexibility to match the capacity and range of the aircraft to the demands of each of our routes.

In December 2017, we entered into an agreement with Airbus to purchase 80 aircraft, which we are committed to receive from 2022 to 2026. The new order includes 46 A320neo and 34 A321neo. Under such agreement and prior to the delivery of each aircraft, we agreed to make pre-delivery payments, which shall be calculated based on the reference price of each aircraft, and following a formula established for such purpose in the agreement.

In November 2018, we amended the agreement with Airbus to reschedule the remaining 26 aircraft deliveries between 2019 and 2022.

In July 2020, we amended the agreement with Airbus to reschedule the delivery of 80 aircraft between 2023 and 2028. In October 2020, we amended the agreement with Airbus to reschedule 18 aircraft deliveries between 2020 and 2022.

In November 2021, the Company entered into a new amendment to the agreement with Airbus to purchase 39 additional A320 NEO family aircraft which we are committed to receive between 2023 and 2029. The new order includes 39 A321NEO. Under such agreement and prior to the delivery of each aircraft, we agreed to make pre-delivery payments, which shall be calculated based on the reference price of each aircraft, and following a formula established for such purpose in the agreement.

Also, in this agreement the Company exercised its right under the agreement with Airbus to convert twenty A320neo aircraft into A321neo aircraft.

As of December 31, 2021, our fleet of 101 Airbus narrow-body aircraft consisted of six Airbus A319s (including one owned), 79 A320s (39 of them are NEO) and 16 A321s (six of them are NEO). We have a young fleet with the average age of our fleet being 5.4 years as of December 31, 2021, as compared to an average of 8.0 years for the other Mexican airlines according to the AFAC. A young fleet leads to better reliability in terms of the performance of our aircraft, greater fuel efficiency and lower maintenance costs.

Consistent with our ULCC business model, each of our aircraft is configured with a single-class high density seating configuration. Our Airbus A319s accommodate up to 144 passengers, our Airbus A320s accommodate up to 186 passengers and our Airbus A321s accommodate up to 239 passengers. Each of our Airbus A320 family aircraft is equipped with IAE or P&W engines. We have taken delivery of 22 spare engines (20 of them leased and two owned) for service replacement and for periodic rotation through our fleet.

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The following table shows the historical development of our fleet from the start of our operations in March 2006 through December 31, 2021:

Fleet additions

(Returns)

2006

2007

2008

2009

2010

    

2011

    

2012

    

2013

    

2014

    

2015

    

2016

    

2017

    

2018

    

2019

    

2020

    

2021

A319

6

8

5

5

(4)

(2)

(3)

(3)

(4)

(2)

A320

2

8

7

7

8

4

8

5

6

3

6

15

A321

    

    

    

2

8

4

2

Total fleet

6

14

21

21

26

34

41

44

50

56

69

71

77

82

86

101

The following table shows the expected development of our fleet from 2022 to 2025 pursuant to our current contracts:

Fleet additions (Returns)

2022E

    

2023E

    

2024E

    

2025E

A319

 

(2)

(1)

(2)

(1)

A320

 

9

(3)

3

(5)

A321

 

7

4

9

9

Total fleet

 

115

115

125

128

We have financed the acquisition of our aircraft through a combination of pre-delivery payment financing (including: (i) the revolving line of credit with Banco Santander México and Banco Nacional de Comercio Exterior, S.N.C., or Bancomext, under which we act as a guarantor and (ii) financing provided by certain lessors in respect of 18 aircraft to be delivered between 2023 and 2024), purchase and leaseback transactions and direct lease agreements, all of which meet the conditions for consideration as operating leases. With respect to purchase and leaseback transactions, we have entered into agreements to purchase aircraft from Airbus which are sold to lessors and are simultaneously leased back through leaseback agreements. We have obtained financing for the pre-delivery payments in respect of all the aircraft to be delivered through 2022. Additionally, we have obtained financing for the pre-delivery payments with certain lessors in respect of 18 aircraft to be delivered in the years 2023 and 2024. As of December 31, 2021, we had 100 aircraft leased pursuant to long-term lease agreements for an average term of 12.14 years each. The operating leases for these aircraft expire between 2022 and 2033. We make monthly rent payments and are not required to make termination payments at the end of the lease unless there is an event of default or total loss of the aircraft. Our aircraft leases provide for fixed rent payments. We are required to make certain non-refundable monthly maintenance payments and to return the aircraft in the agreed upon condition at the end of the lease term. We are responsible for the maintenance, servicing, insurance, repair and overhaul of the aircraft during the term of the lease.

As of December 31, 2021, the purchase agreement with Airbus requires us to accept delivery of 132 Airbus A320 family aircraft in the next eight years (from January 2022 to October 2029). The agreement provides for the addition of 132 aircraft to our fleet as follows: 13 in 2022, five in 2023, 17 in 2024, 16 in 2025, 27 in 2026, 21 in 2027, 19 in 2028 and 14 in 2029. The basic price for each of the firm-order aircraft to be delivered pursuant to our contracts may be adjusted for changes in economic conditions as published by the United States Department of Labor. We must make pre-delivery payments at specific dates prior to the scheduled delivery. Although the purchase agreement with Airbus does not include the option to have fewer aircraft delivered, we cannot guarantee that our fleet will increase as indicated in the table above.

Additionally, during December 2017, we entered into an agreement with Airbus to purchase 80 aircraft, which we are committed to receive from 2022 to 2026. The new order includes 46 A320neo and 34 A321neo. Under such agreement and prior to the delivery of each aircraft, we agreed to make pre-delivery payments, which shall be calculated based on the reference price of each aircraft, and following a formula established for such purpose in the agreement. In November 2018, we amended the agreement with Airbus to reschedule the remaining 26 aircraft deliveries between 2019 and 2022. In July 2020, we amended the agreement with Airbus to reschedule 80 aircraft deliveries between 2023 and 2028. In October 2020, we amended the previous agreement with Airbus to reschedule 18 aircraft deliveries between 2020 and 2022. In November 2021 the Company entered into a new amendment to the referred agreement to purchase 39 additional aircraft which we are committed to receive between 2023 and 2029. Additionally, the Company exercised its right under the agreement with Airbus to convert twenty A320neo aircraft into A321neo aircraft.

We have six scheduled A319 aircraft returns in the next four years: two in 2022, one in 2023, two in 2024 and one in 2025. Additionally, we have 20 A320 aircraft returns in the next four years: four in 2023, four in 2024 and twelve in 2025. We also have three A321 aircraft in the next four years, two in 2023 and one in 2024. However, if necessary, we believe we can negotiate extensions under our lease agreements as we have done in the past, which increases our fleet flexibility. In addition, we have been able to lease

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aircraft from lessors and have the flexibility to do so again in the future. For certain risks related to our lease agreements, see Item 3: “Key Information—Risk Factors—A failure to comply with covenants contained in our aircraft or engine lease agreements, or the occurrence of an event of default thereunder, could have a negative impact on us and our financial condition and results of operations.”

Maintenance

We have mandated and approved maintenance programs required by the applicable aviation authorities, administered by our maintenance and planning engineering department. Our maintenance technicians undergo extensive initial and ongoing training (as applicable by the aviation regulations) to ensure the safety of operations. Line maintenance is performed by our qualified technicians, under our repair station certificates issued by the FAA and AFAC and by maintenance providers which hold the necessary certifications.

Aircraft maintenance and repair consists of routine and non-routine maintenance, and the work performed is divided into three general categories: routine maintenance (including line maintenance), heavy or major maintenance and component service. Line maintenance consists of routine daily and weekly scheduled maintenance checks on our aircraft, including pre-flight, daily, weekly and overnight checks, any diagnostics and routine repairs and any unscheduled items on an as needed basis. Line maintenance events are currently serviced by in-house mechanics and supplemented by contract labor and are primarily completed at the airports we currently serve. Routine maintenance also includes scheduled tasks that can take from seven to 14 days to complete and are required approximately every 24 to 36 months.

Heavy airframe maintenance checks consist of a series of more complex tasks that can take up to six weeks to complete. Heavy engine maintenance is performed approximately every five to six years and includes a more complex work scope, performed at specialized shops. Due to our fleet size and projected fleet growth, we believe outsourcing all of our major maintenance, such as engine servicing and major part repairs, is more efficient. We have entered into a long-term flight hour agreement with IAE and P&W for our engine overhaul services and Lufthansa Technik AG on a power-by-hour basis for component services. We contract with Lufthansa Technik AG for certain technical services and Aeroman for our heavy airframe maintenance. Aeroman is an FAA-approved maintenance provider.

Our recent maintenance expenses have been lower than what we expect to incur in the future because of the relatively young age of our aircraft fleet. Our maintenance costs are expected to increase as the frequency of repair increases with our aircraft’s age. As our aircraft age, scheduled scope work and frequency of unscheduled maintenance events are likely to increase as with any mature fleet.

Safety

We are committed to the safety and security of our passengers and employees. Some of the safety and security measures we have taken include (i) aircraft security and surveillance, (ii) positive bag matching procedures, (iii) enhanced passenger and baggage screening and search procedures, and (iv) secured cockpit doors. We strive to comply with or exceed health and safety regulation standards. In pursuing these goals, we maintain an active aviation safety program and all of our personnel are expected to participate in the program and take an active role in the identification, reduction and elimination of hazards.

Our ongoing focus on safety relies on training our employees to use the proper safety equipment and take the proper safety measures by providing them with the tools and equipment they require to perform their job functions in a safe and efficient manner. Safety in the workplace targets several areas of our operation including flight operations, maintenance, in-flight, dispatch and station operations. We have received the IOSA (IATA’s Operational Safety Audit) certification.

The TSA is charged with aviation security for both airlines and airports in the United States. We maintain active, open lines of communication with the TSA at all of our locations to ensure proper standards for the security of our personnel, customers, equipment and facilities are exercised throughout our operation. In Mexico, the Mexican Civil Aeronautic Authority through the Assistant General Aviation Authority (Dirección General Adjunta de Aviación) is in charge of air traffic safety and has the authority to establish or modify the operations condition of air traffic and to coordinate and control the airports. See Item 4: “Information of the Company—History and Development of the Company.”

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Fuel

Fuel is a major cost component for airlines and is our largest operating expense. Fuel accounted for 38%, 26% and 34% (including derivative and non-derivative financial instruments) of our total operating expenses in 2019, 2020 and 2021, respectively. We purchase fuel from ASA which also supplies fuel and fills our aircraft tanks in Mexico. Under our agreement with ASA, the price of fuel is determined by the Ministry of Finance and Public Credit (Secretaría de Hacienda y Crédito Público) and this agreement may be terminated by either party upon short notice. As of December 31, 2021, we purchased our domestic fuel under the ASA fuel service contract, and international fuel under the WFS, Shell, Uno Petrol, Uno El Salvador, BP Products North America, Chevron and Associated Energy Group fuel service contracts. See Item 3: “Key Information—Risk Factors—We rely on a number of single suppliers for our fuel, aircraft and engines.”

Historically, the fuel costs experienced substantial variances, which cannot be predicted with any degree of certainty since it is subject to many global and geopolitical factors. Fuel prices are dependent on crude oil prices, which are quoted in U.S. dollars. If the value of the U.S. dollar rises against the peso, our fuel costs, expressed in pesos, may increase even absent any increase in the U.S. dollar price of crude oil. Our fuel hedging policy is to enter into fuel derivative contracts to hedge against changes in fuel prices up to 18 months forward subject to certain financing controls. See Item 3: “Key Information—Risk Factors—Our fuel hedging strategy may not reduce our fuel costs.”

Insurance

We maintain insurance policies we believe are of the types customary in the airline industry and as required by the Mexican and U.S. aviation authorities. In connection with our operations, we carry insurance coverage against loss and damages, including war and terrorist risks, for our entire fleet of aircraft, spares and equipment. We carry passenger and third-party liability insurance coverage at levels that we believe are adequate and consistent with general industry standards. We also hold non-aviation insurance coverage that includes directors’ and officers’ liability, vehicles value and liability and life and major medical expenses insurance for our employees.

Sustainability

In 2021 we continue to make efforts in incorporating our corporate sustainability strategy into the business practices. The program is comprised of three focus areas, the Economic and Corporate Governance Focus, the Planet Care Focus, and the People Care Focus. The program is also aligned to our ESG criteria, which are aimed at allowing the efforts of the business to be directed toward sustainable future growth while simultaneously creating long-term value for our stakeholders.

Our Economic and Corporate Governance Focus encompasses policies aimed at cost-reduction, the optimization of resources, and maintenance of operational efficiency and reliability. Through this focus, we also aim to influence the creation of public policies consistent with our corporate sustainability strategy, manage our corporate reputation, and develop clear communication channels with our stakeholders. Moreover, our business values, ethics, and legality are influenced through our anti-corruption and anti-bribery practices, as well as through risk and crisis management systems, as we aim to protect information, and personal data, and transparency in all our processes. In 2021, we received an award from 50/50 Women on Boards and Women Corporate Directors. We are one of the few public companies in Mexico having two women as independent directors.

The Planet Care Focus is defined by our environmental protection policy, through which we aim to achieve aviation’s commitments and respond to regulatory requirements, to protect the planet and reduce polluting emissions. We have taken the following initiatives:

Fuel Efficiency Management Program: As part of this initiative, we aim to maximize fuel efficiency. The focus of this objective is reducing our jet fuel consumption. Our primary effort in reducing jet fuel consumption is directed through the acquisition of a young fleet and continued investment in the best available and cost-efficient technology as well as an array of additional fuel-saving techniques. In 2021, we finished the year with a fleet of 101 aircraft, of which 45 are NEO, which are more fuel-efficient and release fewer CO₂ emissions per ASM. Moreover, we implement operational initiatives such as optimal fuel planned arrival, flight techniques, reduction of auxiliary power unit usage, and reduction of cabin weight through reconfiguration of lighter seats and trolleys.

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We also have initiatives to reduce paper and electricity consumption, minimize waste, promote recycling, and promote efforts for biodiversity protection, and these initiatives implicate both our practices and those of our third-party partners. Some of our environmental programs have received accreditation certificates such as ISO 14001 and 9001. Volaris aims to engage with our key stakeholders and build collaborations with third parties to help drive down the costs of the development and implementation of new technologies. We have joined aviation industry coalition of IATA Fly Net Zero to accelerate our climate goals and influence climate and sustainability policy development.

The People Care Focus aims to strengthen our commitment to people. This includes our employees, customers, and the communities in which we operate. Our labor practices are designed to support solid labor relationships and the well-being of our employees through the Volaris Culture, which is comprised of: (i) Our vision: transcending by creating and materializing the best travel experiences, (ii) Our mission: with the best people and at low cost we enable more people to travel... Well!, (iii) Our behaviors: credibility, respect, impartiality, camaraderie, and pride, and (iv) Our pillars: safety, customer service, and sustained profitability.

We seek to attract, develop, and retain the talent of competent and professional people, the driving desire behind our competitive benefits plan that exceeds applicable legal requirements. We are also committed to maintaining the occupational safety and health of our employees. To that end, we have a series of initiatives that are focused on promoting a workplace free of violence and harassment, fostering the conditions necessary for equal opportunities, and providing appropriate eand frequent training to assure the sustained well-being of our employees. In 2021, we added approximately 1,800 new employees to the Volaris Family.

Additionally, our corporate volunteer program aims to promote a culture of volunteering and a sense of belonging at the Company among our employees.

Relations with the communities in which we operate are integral to our People Care Focus. We seek to generate value for society through two programs: 1) Volaris Aid Aircraft and 2) Human Rights Protection Program. The Volaris Aid Aircraft program aims to help those experiencing vulnerable situations, such as medical emergencies and emergencies due to natural disasters, through strategic alliances. Through the Human Rights Protection program and strategic alliances, we seek to promote the protection of the rights of young girls and boys who travel with Volaris, in order to safeguard them from potential human trafficking and commercial sexual exploitation in the context of travel and tourism.

The People Care Focus also prioritized the well-being, safety, health, and protection of our customers’ rights. We strive to strictly comply with the highest safety standards as well as domestic and international regulations. In a year of growth for our Company, as 2021 was, we focused on operational safety; we obtained the IOSA certification, and we were rated as one of the safest airlines worldwide by Airlineraitings.com. Moreover, 99% of our employees are vaccinated. We are also making an effort to maintain high-quality medical attention to face the pandemic.

Our efforts to maintain our workforce and their families and our customers safe include:

·

investing in 24-hour medical attention;

·

providing free COVID-19 tests for our employees; and

·

providing free flights to our employees and their families as transportation to vaccination sites.

In 2020, these efforts culminated in our current membership in the S&P Dow Jones Sustainability Index. We are one of only five airlines in the world included in this index. We are also the only airline included in the MILA Pacific Alliance Index.

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Organizational Structure

The following is an organizational chart showing Volaris and its subsidiaries as well as Volaris’ ownership and voting percentage in each as of the date of this annual report:

Graphic

Volaris Opco is our airline operating subsidiary in Mexico and the United States. Comercializadora is primarily engaged in marketing, advertising and other commercial matters. Volaris Opco and Servicios Corporativos employs some of our employees. Servicios Corporativos renders specialized services to its affiliates. Viajes Vuela performs travel agency services. Comercializadora Frecuenta has not started operations and may be engaged in providing air travel-related ancillary services. These subsidiaries are incorporated in Mexico. Vuela is our operating subsidiary in Guatemala and Servicios Earhart employ some of our employees in Guatemala. Vuela, Servicios Earhart and GDS are incorporated in Guatemala. Vuela Aviación is our operating subsidiary in Costa Rica and is incorporated there. Vuela El Salvador is incorporated in El Salvador. See Exhibit 21.1 to this annual report for a complete list of our subsidiaries.

On July 14, 2021, Volaris Opco and Servicios Administrativos agreed to a merger, with Volaris Opco as the surviving company. The merger took full legal, accounting and tax effect on August 31, 2021 and the accounts of assets, liabilities, and equity of these companies were merged.

On October 5, 2021, we entered into a share transfer agreement to acquire all the capital stock of GDS through our subsidiaries Vuela and Servicios Earhart. Vuela acquired four shares that represent 80% of the subscribed and paid capital of GDS, while Servicios Earhart acquired one share that represents 20% of the subscribed and paid capital of GDS. GDS holds a Certificate of Aeronautical Technical Services Operator and a Certificate / Exploitation Contract, issued by the General Directorate of Civil Aeronautics of Guatemala, which expires on July 26, 2026.

66

Additionally, under IFRS 10 Consolidated Financial Statements, we exercise control over other trusts as described below.

Pre-delivery payments financing trusts: We have assigned our rights and obligations under our purchase agreement with Airbus with respect to certain aircraft, including our guaranteed obligation to make pre-delivery payments under such agreement to certain Mexican trusts for purposes of financing such pre-delivery payments. These trusts are as follows:

% Equity interest

Name

    

Principal Activities

    

Country

    

2021

CIBanco, S.A., Institución de Banca Múltiple, Fidecomiso 1710

Pre-delivery payments financing

Mexico

    

100.00

%  

CIBanco, S.A., Institución de Banca Múltiple, Fidecomiso 1711

Pre-delivery payments financing

    

Mexico

100.00

%  

·

Trust for the first issuance of asset backed securities: On June 20, 2019, our subsidiary Volaris Opco issued 15,000,000 asset backed trust notes under the ticker VOLARCB 19 in the amount of Ps.1.5 billion through Fideicomiso Irrevocable de Administración número CIB/3249 created by Volaris Opco. This issuance is part of a program approved by the CNBV for an amount of up to Ps.3.0 billion.

·

Trust for the second issuance of asset backed securities: On October 13, 2021, our subsidiary Volaris Opco issued 15,000,000 asset backed trust notes under the ticker VOLARCB 21L in the amount of Ps.1.5 billion through Irrevocable Trust number CIB/3249 created by Volaris Opco. This issuance is part of a program approved by the CNBV for an amount of up to Ps.3.0 billion.

% Equity

Name

    

Principal Activities

    

Country

    

 Interest 2021

 

Fideicomiso Irrevocable de Administración número CIB/3249 “Administrative Trust”

 

Issuance of asset backed securities

 

Mexico

 

100.00

%

·

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

% Equity 

 

Name

    

Principal Activities

    

Country

    

Interest 2021

 

Fideicomiso Irrevocable de Administración número F/307750 “Administrative Trust”

 

Share administration trust

 

Mexico

 

100.00

%

Fideicomiso Irrevocable de Administración número F/745291 “Administrative Trust”

 

Share administration trust

 

Mexico

 

100.00

%

Fideicomiso de Administración número CIB/3081 “Administrative Trust”

 

Share administration trust

 

Mexico

 

100.00

%

C.Property, Plants and Equipment

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

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Our primary corporate offices and headquarters are located in Mexico City at Av. Antonio Dovalí Jaime No.70, 13th Floor, Tower B, Colonia Zedec Santa Fe, México City, zip code 01210, where we lease 6,656 square meters under a lease that expires in June 2031. In addition, we sublease a hangar facility at the Tijuana airport, such sublease expires on July 15, 2022.

ITEM  4A    UNRESOLVED STAFF COMMENTS

None.

ITEM 5    OPERATING AND FINANCIAL REVIEW AND PROSPECTS

A.Operating Results

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

Description of Our Principal Line Items

Passenger Revenues

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

We derive our operating revenues primarily from transporting passengers on our aircraft and some tickets sold by other airlines such as Frontier. The 58% of our total operating revenues were derived from passenger fares in 2021. Passenger revenues are based upon our capacity, load factor and the average passenger revenue per booked passenger. Our capacity is measured in terms of ASMs, which represents the number of seats we make available on our aircraft multiplied by the number of miles the seats are flown. Load factor, or the percentage of our capacity that is actually used by paying customers, is calculated by dividing RPMs by ASMs. The average passenger revenue per booked passenger represents the total passenger revenue divided by booked passengers.

Other passenger revenues include but are not limited to fees charged for excess baggage, bookings through our call center or third-party agencies, advanced seat selection, itinerary changes, V-Club memberships and charters. They are recognized as revenue when the obligation of passenger transportation service is provided by us or when the non-refundable ticket expires at the date of the scheduled travel. The 39% of our total operating revenues were derived from other passenger revenues in 2021.

Non-Passenger Revenues

Our non-passenger revenues include income generated from (i) other non-passenger revenues and (ii) cargo services. In 2021, we derived Ps.1.4 billion, or 3% of our total operating revenues from these sources.

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

Revenues from cargo services are recognized when the cargo transportation is provided (upon delivery of the cargo to the destination).

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

For the Years ended December 31, 

    

2019

    

2020

    

2021

Operating revenues:

Passenger revenues:

Fare revenues

67

%  

58

%  

58

%

Other passenger revenues

30

%  

39

%  

39

%

Non-passenger revenues:

Other non-passenger revenues

3

%  

4

%  

3

%

Cargo

0

%  

1

%  

1

%

Non-derivative financial instruments:

0

%  

(2)

%  

(1)

%

Total operating revenues

100

%  

100

%  

100

%

Other operating income

(1)

%  

(3)

%  

0

%  

Fuel expense, net

33

%  

30

%  

28

%

Landing, take-off and navigation expenses

15

%  

18

%  

13

%

Depreciation of right of use assets

14

%  

23

%  

12

%

Salaries and benefits

10

%  

16

%  

11

%

Maintenance expenses

4

%  

5

%  

4

%

Sales, marketing and distribution expenses

4

%  

8

%  

4

%

Aircraft and engine variable lease expenses

3

%  

8

%  

4

%

Other operating expenses

3

%  

5

%  

3

%

Depreciation and amortization

2

%  

4

%  

3

%

Total operating expenses, net

87

%  

115

%  

82

%

Operating income (loss)

13

%  

(15)

%  

18

%

Finance income

1

%  

0

%  

0

%  

Finance cost

(7)

%  

(14)

%  

(6)

%  

Foreign exchange gain (loss), net

4

%  

2

%  

(6)

%  

Income (loss) before income tax

11

%  

(26)

%  

6

%  

Income tax (expenses) benefit

(3)

%  

6

%  

(1)

%  

Net income (loss)

8

%  

(19)

%  

5

%  

During 2021, revenues from our international operations increased 89% as compared to 2020.

Revenue Recognition

Passenger revenues

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

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

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

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We also classify “V-Club” and other similar services, which are recognized as revenue over time when the service is provided, as other passenger revenue.

Code-share tickets can be purchased directly from the Volaris’ website. The airline that provides the transportation recognizes the revenue when the service is provided.

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

Our tickets are non-refundable. However, if we cancel a flight for causes attributable to us, including as a result of the COVID-19 pandemic, then the passenger is entitled to either reschedule their flight at no cost or receive a refund or a voucher. No revenue is recognized until either the voucher is redeemed and the associated flight occurs, or the voucher expires. When vouchers issued exceed the original amount paid by the passenger, the excess is recorded as a decrease of operating revenues. All our revenues related to future services are rendered through a period of approximately 12 months.

Non-passenger revenues

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

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

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

Additionally, we recognize as revenue the air transportation facility charges for no-show passengers, when the non-refundable ticket expires at the date of the scheduled travel.

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

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

Operating Expenses, net

Our operating expenses consist of the following line items.

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

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

Landing, Take-off and Navigation Expenses. Landing, take-off and navigation expenses include airport fees, handling charges, and other rents, which are fixed and variable facilities’ expenses, such as the fees charged by airports for the use or lease of airport facilities, as well as costs associated with ground handling services that we outsource at certain airports. This expense also

70

includes route charges, which are the costs of using a country’s or territory’s airspace and are levied depending on the distance flown over such airspace.

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

With respect to this line item, IFRS 16 was issued in January 2016 replaced IAS 17 “Leases,” IFRIC 4 “Determining Whether an Arrangement Contains a Lease,” SIC-15 “Operating Leases-Incentives” and SIC-27 “Evaluating the Substance of Transactions Involving the Legal Form of a Lease.” IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single on-balance sheet model. Under IFRS 16, at the commencement date of a lease, a lessee recognizes a liability to make lease payments (i.e., the lease liability) and an asset representing the right to use the underlying asset during the lease term (i.e., the right-of-use asset). Lessees are required to separately recognize the interest expense on the lease liability and the depreciation expense on the right-of-use asset. Lessees are also required to remeasure the lease liability upon the occurrence of certain events (e.g., a change in the lease term or a change in future lease payments). The lessee generally recognizes the amount of the remeasurement of the lease liability as an adjustment to the right-of-use asset. In addition, for leases denominated in a foreign currency other than our functional currency the lease liability will be remeasured at each reporting date, using the foreign exchange of the period. We adopted IFRS 16 on the mandatory date, January 1, 2019, through the full retrospective method recognizing the effect on our statement of financial position as of January 1, 2017. This led to Ps.23.5 billion of right-of-use assets and Ps.32.7 billion as lease liabilities as of January 1, 2017. Our financial results as of and for the years ended December 31, 2017 and 2018 as presented in our annual report for the year ended December 31, 2018 filed with the SEC on April 26, 2019 have been adjusted in our Audited Consolidated Financial Statements presented in this annual report to take into account this application of IFRS 16.

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

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

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

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

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

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

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

For the years ended December 31, 

    

2019

    

2020

    

2021

    

2021

 

 

(In U.S. $

(In Ps.cents)

 

cents)(1)

Other operating income

(1.3)

 

(4.0)

 

(0.8)

 

Fuel expense, net

47.7

 

36.3

 

44.0

 

2.1

Landing, take-off and navigation expenses

20.9

 

22.4

 

21.4

 

1.0

Depreciation of right of use assets

19.2

 

27.6

 

19.4

 

0.9

Salaries and benefits

14.7

 

18.9

 

17.3

 

0.8

Maintenance expenses

6.0

 

6.4

 

6.9

 

0.3

Sales, marketing and distribution expenses

5.9

 

10.1

 

7.0

 

0.3

Aircraft and engine variable lease expenses

3.9

 

10.1

 

6.0

 

0.3

Other operating expenses

4.5

 

6.3

 

4.8

 

0.2

Depreciation and amortization

2.8

 

4.9

 

4.1

 

0.2

Total operating expenses, net

124.3

139.0

130.1

6.1

(1)Peso amounts were converted to U.S. dollars solely for the convenience of the reader at the rate of Ps.20.5835 per U.S. $1.00 as the rate for the payment of obligations denominated in foreign currency payable in Mexico in effect on December 31, 2021. 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.

Recent Developments

Our business and the airline industry have experienced material adverse impacts due to COVID-19. particularly in terms of passenger traffic. The following chart sets forth passenger traffic for the Mexican airline industry by Mexican carriers in each of the four quarters of 2021 as compared to the each of the four quarters of 2020, as reported by AFAC:

    

2020

    

2021

    

Variation

 

(In thousands, except for %)

 

First Quarter

15,229.4

9,443.6

(38)

%

Second Quarter

 

1,868.5

 

13,701.2

 

633

%

Third Quarter

 

6,983.7

 

15,007.0

 

115

%

Fourth Quarter

 

10,232.3

 

16,260.4

 

59

%

Total

 

34,313.9

 

54,412.2

 

59

%

For additional information see “—Trends and Uncertainties Affecting Our Business—Impact of COVID-19— Conflict between Russia and Ukraine” below.

Trends and Uncertainties Affecting Our Business

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

Impact of COVID-19. COVID-19 drastically reduced demand for air travel and caused major disruptions and volatility in global financial markets.There have been other broad and continuing concerns related to the COVID-19 effects on international trade (including supply chain disruptions and export levels), travel, restrictions on our ability to access our facilities or aircraft, requirements to collect additional passenger data, employee productivity, employee illness, increased unemployment levels, securities markets, and other economic activities, particularly for airlines, that had a destabilizing effect on financial markets and economic activity. Nonetheless, we saw an important improvement in Mexico´s demand for air travel from the second quarter of 2021, due to fewer sanitary restrictions, greater willingness of the people to travel and a gradual recovery of domestic economic activity.

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Despite the gradual recovery we saw in ASMs and route operation during 2021, the ongoing COVID-19 pandemic may continue to have a negative impact on our financial condition and results of operations, as a result of the following indicators:

·

a resurgence of COVID-19 infection rates could lead Mexico and the countries in which we operate to return to partial or total lockdowns, which would most likely result in a decrease in demand for our flights (which in turn may require reductions to our ASMs at levels similar to the early months of the pandemic) and aircraft utilization rate and consequently a decrease in our total operating revenues;

·

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

·

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

·

even after the COVID-19 pandemic eases, there is a risk that we will experience reduced demand in the near to mid-term due to the potential economic impact of the pandemic on the travel industry (business and leisure) and on our customers, as well as customer health concerns about the safety of air travel.

Conflict between Russia and Ukraine. Following the recent geopolitical crisis in Eastern Europe, as of February 21, 2022, the Russian Federation recognized the independence of the Ukrainian separatist regions of Donetsk and Luhansk in the Donbas region. On the day after, the Federal Council of Russia authorized use of military force abroad, which triggered an invasion of Ukraine by the Russian Armed Forces on February 24, 2022.

The invasion was widely condemned internationally with several sanctions being imposed against Russia and Belarus. As a result, the global markets reacted negatively, with fuel prices surging to their highest level since 2008 amid supply concerns.

The airline industry is impacted by the price and availability of fuel. Fuel is our largest cost, representing approximately 34% of our total operating cost in 2021, and 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.

The sensitivity analysis provided below presents the impact of a change of U.S.$0.01 per gallon in fuel market spot price in the Company´s financial performance. Considering these figures, an increase of U.S.$0.01 per gallon in the fuel prices during 2020 and 2021 would have impacted Volaris’ operating expenses in U.S.$1,762 thousands and U.S.$2,731 thousands, respectively.

    

For the years ended December 31,

2020

2021

Operating costs

Operating costs

 

(In thousands of U.S. dollars)

+ U.S. $0.01 per gallon

 

1,762

 

2,731

- U.S. $0.01 per gallon

 

(1,762)

 

(2,731)

The Company has been proactively trying to mitigate this impact over our business through revenue management and a continued effort towards a reduced fuel consumption. Nonetheless, our ability to pass on any significant increases in fuel costs through fare increases is also limited by our ultra-low-cost business model and market high elasticity to price.

The Company can not assure that this macroeconomic disruption would not adversely affect our financial performance, since Volaris can neither control nor accurately predict the performance of the fuel prices in the global markets or its availability in the airports in which we operate. 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 expenses and on our business, results of operations and financial condition.

Along the cost pressure due to the higher fuel price, this major disruption in the global economy has also raised concerns regarding inflationary pressures and the global economy growth rate. Such disruption in inflation indexes could affect the Company’s

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cost the near future, as several contracts are subject to annual adjustments based on historical inflation ratios. A reduction in the economy’s growth pace could also adversely impact demand for air transport services, potentially affecting our financial performance.

Economic Conditions in Mexico. Mexico’s GDP is expected to grow by 2.0% per year for the next ten years according to the Mexican Central Bank, which is in line with the expected annual growth for the United States during the same period as reported by the U.S. Federal Reserve. See “Key Information—Risk Factors—Risks Related to the Airline Industry—Public health threats, such as the H1N1 flu virus, the bird flu, Severe Acute Respiratory Syndrome (SARS), the Zika virus, COVID-19 and other highly communicable diseases, could affect suspension of domestic and international flights, travel behavior and could have a material adverse effect on the Mexican economy, airline industry reputation, the price of our shares, our business, results of operations and financial condition” for more recent information on the impact of COVID-19 on Mexico’s future macroeconomic condition.

Regarding population dynamics as of 2020, according to the INEGI intercensal survey, around 34% of the Mexican population was under 20 years of age, which benefits us by providing a strong base of potential customer growth. Inflation in Mexico during 2021 was 7.26% according to the INEGI. As of December 31, 2021, international reserves in Mexico were at U.S. $202.4 billion.

Competition. The airline industry is highly competitive. The principal competitive factors in the airline industry are fare pricing, total price, flight schedules, aircraft type, passenger amenities and related services, number of routes served from a city, customer service, safety record and reputation, code-sharing relationships and frequent flier programs and redemption opportunities. Our current and potential competitors include traditional network airlines, low-cost carriers, regional airlines and new entrant airlines. We typically compete in markets served by legacy carriers and other low-cost carriers, and, to a lesser extent, regional airlines. Some of our current or future competitors may have greater liquidity and access to capital and may serve more routes than we do.

Our principal competitive advantages are our low base fares and our focus on VFR travelers, leisure travelers and cost-conscious business people. These low base fares are facilitated by our low CASM, which at Ps. 130.9 cents (U.S. $6.45 cents) we believe was the lowest CASM in Latin America in 2021, compared to Azul at U.S. $9.44 cents, Copa at U.S. 9.10 cents, Gol at U.S. $12.39 cents, Grupo Aeroméxico at U.S. $13.31 cents and LATAM at U.S. $14.83 cents. We also have lower costs than our publicly traded target market competitors in the United States, including Alaska Air at U.S. $10.47 cents, Delta at U.S. $14.40, Jet Blue at U.S. $11.30 cents, Southwest Airlines at U.S. $10.66 cents, Frontier at U.S. $8.10 cents, Spirit at U.S. $8.07 cents, Allegiant at U.S. $8.26 and United at U.S. $14.36 cents.

Our competitors and the Mexican airline industry as a whole have also been significantly impacted by the COVID-19 pandemic. Our principal competitors in Mexico are Grupo Aeroméxico and VivaAerobus. Internationally, we compete with Grupo Aeroméxico, Viva Aerobus and many U.S.-based carriers, including Alaska Air, American, Delta and United. In the Mexico — Central America market our principal competitors are Grupo Aeroméxico and Avianca, while in the Central America — U.S. market our principal competitors are Avianca and Delta. For the Mexico — South America market our principal competitors are Grupo Aeroméxico, Viva Aerobus and LATAM.

In 2021, the Mexican low-cost carriers (including us) combined had 69.5% of the domestic market based on passenger flight segments. We had 41.2% of the domestic market which placed us first, according to AFAC. As of December 31, 2021, the number of commercial aircraft in service in Mexico increased to 310, as compared to 275 as of December 31, 2020, according to AFAC. This 13% increase was comprised mainly of narrow body aircraft, including 79 Airbus A320s, 51 Boeing 737s, and 16 Airbus A321s. On June 30, 2020, Grupo Aeroméxico, our largest competitor by domestic and international market share in 2019, announced that it was filing for Chapter 11 bankruptcy protection in the United States. On March 17, 2022 Grupo Aeromexico announced that it had concluded its restructuring process. As of December 31, 2021, AFAC reports indicate that Grupo Aeroméxico’s subsidiaries Aeroméxico and Aeroméxico Connect had fleets of 79 and 42 aircraft, respectively, as compared to 58 and 44, respectively, as of December 31, 2020. In addition, Interjet, our second largest competitor by international market share in 2019, has been unable to resume international flights since suspending the routes in March 2020. Interjet’s fleet decreased by 100% in 2021, from three aircraft as of December 31, 2020 to zero as of December 31, 2021, according to information published by the AFAC. Interjet has not operated any domestic flights since December 2020. According to media reports, on April 26, 2021, Interjet announced that its shareholders approved the filing of a reorganization process (concurso mercantil) in Mexico. VivaAerobus, our second largest competitor by domestic market share in 2020, has increased their fleet from 43 as of December 31, 2020 to 55 as of December 31, 2022. In addition to these changes in fleet size, our market share has also increased. As of December 2021, our domestic market share had increased 3.24 percentage points to 39% and our international market share decreased 3 percentage points to 11%, in each case as compared to our market shares as of December 2020.

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We also face domestic competition from ground transportation alternatives, primarily long-distance bus companies. There are limited passenger rail services in Mexico. There is a large bus industry in Mexico, with total passenger segments of approximately 1.87 billion in 2020 (the latest year for which data is available as of the date of this annual report), of which approximately 50.4 million were executive and luxury passenger segments, according to the Mexican Authority of Ground Transportation (Dirección General de Autotransporte Federal) and which could include both long- and short-distance travel. We set certain of our promotional fares at prices lower than bus fares for similar routes in order to stimulate demand for air travel among passengers who in the past have traveled long distances primarily by bus. We believe a small shift of bus passengers to air travel would dramatically increase the number of airline passengers and bring the air trips per capita figures in Mexico closer to those of other countries in the Americas.

Our principal competitors for the international routes between Mexico and the United States are Grupo Aeroméxico, Alaska Air, American, Delta and United. We reached 38.1% market share on the routes that we operate and 11.4% market share considering all routes between Mexico and the United States in 2021, according to the AFAC.

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

Donald Trump became president of the United States on January 20, 2017 and implemented a number of immigration policies that have adversely affected the United States—Mexico travel behavior, especially in the VFR and leisure markets. President Trump was not elected to a second term, and on January 20, 2021, Joseph Biden became the president of the United States. While President Biden has reversed many of President Trump’s immigration policies, we can offer no assurance of the extent to which his administration will continue to do so. President Trump’s immigration policies had a negative impact on our results of operations during 2019 and 2020 and this negative impact continued to some extent in 2021 although many of these immigration policies have been reversed by the new U.S. presidential administration.

Fuel. Fuel costs represent the single largest operating expense for most airlines, including ours, accounted for 38%, 26% and 34% (including derivative and non-derivative financial instruments) of our total operating expenses for 2019, 2020 and 2021, respectively. Fuel availability and pricing are also subject to refining capacity, periods of market surplus and shortage, and demand for heating oil, gasoline and other petroleum products, as well as economic, social and political factors and other events occurring throughout the world, which we can neither control nor accurately predict. We source a significant portion of our fuel from refining sources located in Mexico. Largely as a result of the conflict between Russia and Ukraine, we expect jet fuel prices in 2022 to remain higher than in 2021.

During the year ended December 31, 2021, we did not enter into new hedging positions for Jet Fuel.

During the year ended December 31, 2020, we entered into US Gulf Coast Jet Fuel 54 Asian call options designated to hedge 23,967 thousand gallons of fuel. Such hedges represented a portion of our projected consumption for second and third quarter 2020 and the first quarter of 2021. Additionally, during the same period, we entered into US Gulf Coast Jet Fuel 54 Asian Zero-Cost collar options designated to hedge 81,646 thousand gallons of fuel. The latter hedges represented a portion of our projected consumption for the second quarter and half of 2020 and second quarter of 2021.

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

Our fuel cost is referenced to US Gulf Coast Jet Fuel 54 and US West Coast Jet Fuel, which are the crudes utilized to determine the cost of the fuel provided by our suppliers. Based on our 2021 annual fuel consumption, a 5% increase in the average price per gallon of those reference prices would have increased our fuel expense for 2021 by approximately Ps.523 million.

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As of December 31, 2021, we purchased our domestic fuel under the ASA fuel service contract, and international fuel under the WFS, Shell, Uno Petrol, Uno El Salvador, BP Products North America, Chevron and Associated Energy Group fuel service contracts. The cost and future availability of fuel cannot be predicted with any degree of certainty.

Currency fluctuations. 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. If the peso declines in value against the U.S. dollar, our operating demand would be adversely affected.

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

As of December 31, 2019, 2020 and 2021, our net monetary liability position denominated in U.S. dollars was U.S. $1.7 billion, U.S. $1.7 billion and U.S. $1.6 billion, respectively. As a result of either the appreciation or depreciation of the peso against the U.S. dollar in 2019, 2020 and 2021, and our net U.S. dollar liability position, we recorded a foreign exchange gain (loss), net of Ps.1.4 billion, Ps.0.5 billion and Ps.(2.6) billion, respectively. In order to mitigate the foreign exchange risk, we also entered into hedge relationships through non-derivative financial instruments.

As of December 31, 2021, as a result of the change in functional currency from the Mexican peso to the U.S. dollar, we concluded that these hedging strategies will no longer be effective and accounted for the discontinuation of the hedge relationships. Accordingly, the cash flow hedge reserve in other comprehensive income at the date of the change of Ps.2,251.4 million or U.S.$109 million was reclassified to the income statement, which represented a loss within the foreign exchange (loss) gain, net caption. Please see Item 3: --“ Currency fluctuations or the devaluation and depreciation of the peso could adversely affect our business, results of operations, financial condition, and prospects”.

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

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

Certain maintenance activities, due to limited internal capabilities or capacity, are sub-contracted to qualified maintenance, repair and overhaul organizations. Routine maintenance also includes scheduled tasks that require a hangar to be completed and can take from seven to 14 days to accomplish and are required approximately every 24 or 36 months, such as 24-month checks and C checks All routine maintenance costs are expensed as incurred.

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

(iii)Engine services are provided pursuant to an engine flight hour agreement that guarantees a cost performance restoration, provides miscellaneous engine coverage, contributes to the cost of foreign objects damage events, ensures protection from annual escalations for engine repair services. We also have a power-by-hour agreement for component maintenance, which guarantees the availability of most of the aircraft parts for our fleet when they are required and provides support for aircraft components to meet redelivery conditions of the leasing contract with a capped cost at the time of redelivery. The costs associated with the miscellaneous engine coverage and the component services agreements are recorded in the consolidated statements of operations.

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Due to the young age of our fleet 5.4 years on average as of December 31, 2021, maintenance expense in 2019, 2020 and 2021 remained relatively low. For the years ended December 31, 2019, 2020 and 2021 we capitalized major maintenance events as part of leasehold improvements to the flight equipment in the amount of Ps.659.1 million, Ps.646.2 million and Ps.1,742.9 million, respectively. For the years ended December 31, 2019, 2020 and 2021 the amortization of these deferred major maintenance expenses was Ps.450.4 million, Ps.652.1 million and Ps.838.4 million, respectively. The amortization of deferred maintenance expenses is included in depreciation and amortization rather than total maintenance costs as described in “—Other Accounting Polices and Estimates.” In 2019, 2020 and 2021, total maintenance costs amounted to Ps.1.5 billion, Ps.1.2 billion and Ps.2.0 billion, respectively. As the fleet ages, we expect that maintenance costs will increase in absolute terms. The amount of total maintenance costs and related amortization of heavy maintenance expense is subject to many variables such as future utilization rates, average stage length, the size and makeup of the fleet in future periods and the level of unscheduled maintenance events and their actual costs. Accordingly, we cannot reliably quantify future maintenance expenses for any significant period. However, we estimate that based on our scheduled maintenance events, current major maintenance expense and maintenance-related amortization expense will be approximately U.S. $269.2 million and U.S. $86.3 million, respectively, in 2022.

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

Ramp-up Period for New Routes. During 2019 we opened 30 new routes, added 13 more in 2020 and six more in 2021. As we continue to grow, we would expect to continue to experience a lag between when new routes are put into service and when they reach their full profit potential. See Item 3: “Key Information—Risk Factors—Airline consolidations and reorganizations could adversely affect the industry.”

Critical Accounting Policies and Estimates

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

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

Return obligations. The aircraft and engine lease agreements also require that the aircraft and engines be returned to lessors under specific conditions of maintenance. The costs of return, which in most cases are related to scheduled major maintenance, are estimated, and recognized ratably as a provision from the time it becomes likely such costs will be incurred and can be estimated reliably. These return costs are recognized on a straight-line basis as a component of variable rent expenses and the provision is included as part of other liabilities, through the remaining lease term. We estimate the provision related to airframe, engine overhaul and limited life parts using certain assumptions including the projected usage of the aircraft and the expected costs of maintenance tasks to be performed. For the years ended December 31, 2019, 2020 and 2021, the Company expensed as variable rent Ps.681.0 million, Ps.1,428.2 million and Ps.1,131.1 million, respectively.

Other Accounting Policies and Estimates

Other accounting policies and estimates used in the preparation of our Consolidated Statement Financial Position and Consolidated Statement of Operations are presented as follows:

Aircraft Maintenance Deposits Paid to Lessors. Our lease agreements provide that we pay maintenance deposits or supplement rent to aircraft lessors to be held as collateral in advance of our performance of major maintenance activities. Maintenance deposits are held as collateral in cash. These lease agreements provide that maintenance deposits are reimbursable to us upon completion of the maintenance event in an amount equal to the lesser of (i) the amount of the maintenance deposits held by the lessor associated with the specific maintenance event or (ii) the qualifying costs related to the specific maintenance event. Substantially all of

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these maintenance deposits are calculated based on a utilization measure, such as flight hours or cycles, and are used solely to collateralize the lessor for maintenance time run off the aircraft until the completion of the maintenance of the aircraft and engines. We paid Ps.64.6 million, Ps.702 million and Ps.1,619.4 million in maintenance deposits, net of reimbursements, to our lessors for the years ended December 31, 2019, 2020 and 2021, respectively.

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

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

Thus, any excess of the required deposit over the expected cost of the major maintenance event is recognized as supplemental rent starting from the period the determination is made. When it is not probable that we will recover amounts currently on deposit with a lessor, such amounts are expensed as supplemental rent. We expensed Ps.295.7 million in 2019, Ps.421.0 million in 2020 and Ps.775.6 million in 2021 of maintenance deposits as supplemental rent.

As of December 31, 2019, 2020 and 2021 we had prepaid maintenance deposits of Ps.6.4 billion, Ps.7.1 billion and Ps.8.8 billion, respectively, recorded in our consolidated statements of financial position. We currently expect that these prepaid maintenance deposits are likely to be recovered primarily because there is no rate differential between the maintenance deposit payments and the expected cost for the related next maintenance event that the deposits serve to collateralize.

During the year ended December 31, 2019, the Company extended the lease period, through lease agreements, of one aircraft. Additionally, the Company extended the lease period for a spare engine in 2019. During the year ended December 31, 2020, the Company did not extend the period of lease contracts for aircraft and engines. During the year ended December 31, 2021, the Company extended the lease period for aircraft and engines, through lease agreements for fifteen aircraft and three engines.

During the year ended December 31, 2021, we added 15 new net aircraft to our fleet. The lease agreements of some of these aircraft do not require the obligation to pay maintenance deposits to lessors in advance in order to ensure major maintenance activities, so we do not record guarantee deposits regarding these aircraft. However, some of these agreements provide the obligation to make a maintenance adjustment payment to the lessors at the end of the contract period. This adjustment covers maintenance events that are not expected to be made before the termination of the contract. We recognize this cost as supplemental rent during the lease term of the related aircraft, in the consolidated statements of operations.

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

In 2019, 2020 and 2021, we capitalized costs of major maintenance events of Ps.659.1 million, Ps.646.2 million and Ps.1,742.9 million, respectively and we recognized amortization expenses of Ps.450.4 million, Ps.652.1 million and Ps.838.4 million, respectively. The amortization of deferred maintenance expenses is included under the caption depreciation and amortization expense in our consolidated statements of operations. If the amortization of major maintenance expenditures were classified as maintenance expense, they would amount to Ps.1.9 billion, Ps.1.8 billion and Ps.2.8 billion for the years ended December 31, 2019, 2020 and 2021, respectively.

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In August 2012, we entered into a total support agreement with Lufthansa Technik AG, or LHT, as amended in December 2016, that expires June 30, 2023, which includes a total component support agreement (power-by-hour) and ensures the availability of aircraft components for our fleet when they are required. The cost of the total component support agreement is applied monthly to the results of operations. As part of this total support agreement, we received credit notes of Ps.46.5 million and of Ps.28.1 million, which were deferred on the consolidated statements of financial position and are being amortized on a straight - line basis, prospectively during the term of the agreement.

During 2019, 2020 and 2021, we amortized a corresponding benefit from these credit notes of, Ps.5.2 million, Ps.5.2 million and Ps.5.2 million, respectively, which is recognized in the consolidated statements of operations as a reduction of maintenance expenses.

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

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

Starting January 1, 2019, we measure the right-of-use asset arising from the leaseback at the proportion of the previous carrying amount of the asset that relates to the right of use retained by the seller-lessee. Accordingly, we recognize in the Statement of Operations only the amount of any gain or loss that relates to the rights transferred to the buyer-lessor. If the fair value of the consideration for the sale of an asset does not equal the fair value of the asset, or if the payments for the lease are not at market rates, then the Company adjusts the difference to measure the sale proceeds at fair value and accounts for any below-market terms as a prepayment of lease payments an any above market terms as additional financing provided by the buyer-lessor to the seller-lessee.

During the year ended December 31, 2019, 2020 and 2021, we sold and transferred aircraft and engines to third parties, giving rise to a gain of Ps.284.8 million, Ps.710.5 million and Ps.195.6 million, respectively, that was recorded as other operating income in the consolidated statements of operations.

During the year ended December 31, 2011, we entered into aircraft and spare engine sale and leaseback transactions, which resulted in a loss of Ps.30.7 million. This loss was deferred on the consolidated statements of financial position and is being amortized over the contractual lease term. For the years ended December 31, 2019, 2020 and 2021, we amortized a loss of Ps.3.0 million, Ps.3.0 million and Ps.2.2 million, respectively, as additional aircraft rental expense.

Equity-settled Transactions

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

Long-Term Retention Plans

Management Incentive Plan

Certain key employees received additional benefits through a Management Incentive Plan, which was classified as an equity-settled. As of the grant date the fair value of the transaction is fixed and is not adjusted by subsequent changes in the fair value of capital instruments. The total cost of the management incentive plan was Ps.2.7 million. This amount was expensed over the vesting period, which commenced retroactively upon consummation of our initial public offering and ended on December 31, 2015.

The factors considered in the valuation model for the management incentive plan included a volatility assumption estimated from historical returns on common stock of comparable companies and other inputs obtained from independent and observable

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sources, such as Bloomberg. The share spot price fair value was determined using the market approach valuation methodology, with the following assumptions:

    

2012

Dividend yield (%)

 

0.00

%

Volatility (%)

 

37.00

%

Risk—free interest rate (%)

 

5.96

%

Expected life of share options (years)

 

8.80

Exercise share price (in Mexican pesos Ps.)

 

5.31

Exercise multiple

 

1.10

Fair value of the stock at grant date

 

1.73

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

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

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

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

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

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

During 2020, the key employees participating in the management incentive plan did not exercise any Series A shares. Thus, the key employees did not pay any amounts to the Management Trust corresponding to any exercised shares.

During 2021, the key employees participating in the management incentive plan exercised 7,653,981 Series A shares. As a result, the key employees paid Ps.40.7 million to the Management Trust corresponding to the shares exercised. Thereafter, we received from the Management Trust the payment related to the exercised shares by the key employees as a repayment of the loan between the Company and the Management Trust.

At December 31, 2019, 2020 and 2021, the shares held in trust to satisfy the management options were considered treasury shares. At December 31, 2019 and 2020, 7,653,981 and 7,653,981 share options pending to be exercised were considered as treasury shares, respectively. At December 31, 2021 all share options were exercised.

Movements during the year

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

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Exercise price

Total in thousands

    

Number

    

in pesos

    

of pesos

Outstanding as of January 1, 2019

 

10,433,981

Ps.

5.31

Ps.

55,441

Granted during the year

 

Forfeited during the year

 

Exercised during the year

 

(2,780,000)

5.31

(14,773)

Outstanding as of December 31, 2019

 

7,653,981

Ps.

5.31

Ps.

40,668

Granted during the year

 

Forfeited during the year

 

Exercised during the year

 

Outstanding as of December 31, 2020

 

7,653,981

Ps.

5.31

Ps.

40,668

Granted during the year

 

Forfeited during the year

 

Exercised during the year

 

(7,653,981)

5.31

(40,668)

Outstanding as of December 31, 2021

 

Ps.

Ps.

Long-term Incentive Plan (equity-settled)

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

(i)

Servicios Corporativos granted a bonus to each key executive.

(ii)

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

(iii)

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

(iv)

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

(v)

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

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

In November 2019, 2020 and 2021, extensions to this plan were approved by our board of directors. The total cost of each of the extensions approved was Ps.86.8 million (or Ps.56.4 million, net of withheld taxes), Ps.92.1 million (or Ps.59.9 million, net of withheld taxes) and Ps.104.7 (Ps.68.1 net of withheld taxes), respectively. Under these extensions, certain of our key employees received granted a special bonus that was transferred to the administrative trust for the acquisition of our Series A shares.

During 2019, 2020 and 2021, we recognized Ps.49.7 million, Ps.75.0 million and Ps.89.5 million, respectively, as compensation expense associated with the long-term incentive plan in our consolidated statements of operations.

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Movements during the year

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

Number of

    

Series A shares

Outstanding as of January 1st, 2019

3,553,295

Purchased during the year

2,694,600

Granted during the year

Exercised/vested during the year

(959,614)

Forfeited during the year

(173,090)

Outstanding as of December 31, 2019

*5,115,191

Purchased during the year

3,159,763

Granted during the year

Exercised/vested during the year

(2,142,426)

Forfeited during the year

(327,217)

Outstanding as of December 31, 2020

*5,805,311

Purchased during the year

1,849,417

Granted during the year

Exercised during the year

(2,612,575)

Forfeited during the year

(551,732)

Outstanding as of December 31, 2021

*4,490,421

*

These shares were presented as treasury shares in the consolidated statements of financial position as of December 31, 2019, 2020 and 2021, all are considered outstanding for basic and diluted earnings per share purposes because the holders are entitled to dividends if and when distributed.

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

Number of Series A shares

    

Vesting period

2,408,277

November 2021-2022

1,485,802

November 2022-2023

596,342

November 2023-2024

4,490,421

During the year ended December 31, 2021, some key employees left the Company; therefore, the vesting conditions were not fulfilled. In accordance with the plan, Servicios Corporativos is entitled to receive the proceeds of the sale of such shares. During the year ended December 31, 2019, 2020 and 2021, shares were (173,090), (327,217) and (551,732).

Board of Directors Incentive Plan (BoDIP)

In April 2018, our shareholders at the annual shareholders meeting authorized a stock plan for the benefit of certain independent members of our board of directors, or the BoDIP. The BoDIP was implemented through the execution of: (i) trust agreement number CIB/3081 created by us, as trustor, and CIBanco, S.A., Institucion de Banco Multiple, as trustee, on August 29, 2018; and (ii) a stock purchase agreement between each plan participant and the trustee, under which a plan participant has a period of five years to exercise his/her option to pay a fixed purchase price, with the title to the shares transferring to the plan participant upon payment of such purchase price by the plan participant. The number of shares held by the trustee as of December 31, 2020 was 5,233,693, of which 3,161,349 shares were priced at Ps.9.74; 968,706 shares were priced at Ps. 16.80; 977,105 shares were priced at 16.12 and 126,533 shares were priced at Ps.26.29. As of December 31, 2020, there were no exercises under the BoDIP. The number of shares held by the trustee as of December 31, 2021 was 4,589,726, of which 610,848 shares were priced at Ps.32.23; 2,458,827 shares were priced at Ps.9.74; 807,255 shares were priced at Ps.16.80; 586,263 shares were priced at Ps.16.12 and 126,533 shares were priced at Ps.26.29.

During 2021, the key employees participating in BoDIP exercised 1,254,815 Series A shares. As a result, the key employees paid Ps.15.9 million to the Management Trust corresponding to the shares exercised. Thereafter, we received from the Management Trust the payment related to the exercised shares by the key employees as a repayment of the loan between the Company and the Management Trust.

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Cash-settled Transactions

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

Long-term Retention Plans

Management Incentive Plan II

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

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

The carrying amount of the liability relating to these SARs as of December 31, 2019, 2020 and 2021 was Ps.70.6 million, Ps.177.8 million and Ps.115.5 million, respectively. The compensation benefit is recognized in our consolidated statements of operations under the caption salaries and benefits over the service period. During the years ended December 31, 2019, 2020 and 2021 we recorded an expense (benefit) of Ps.37.8 million, Ps.107.2 million and Ps.(62.3) million, respectively, associated with these SARs in our consolidated statements of operations. No SARs were exercised during 2021 and 2020.

Cash-settled Long-term Incentive Plan

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

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

Under the plan extensions described above, no SARs were granted to any of our key executives for the years ended December 31, 2019, 2020 and 2021.

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

The carrying amount of the liability relating to the SARs as of December 31, 2019 was Ps.1.9 million. The compensation cost is recognized in our consolidated statements of operations under the caption of salaries and benefits over the service period. During the years ended December 31, 2019, 2020 and 2021, we recorded an expense (benefit) of Ps.3.0 million, Ps.(1.9) million and Ps.0 million, respectively, in respect of these SARs in our consolidated statements of operations. The retention plan granted in previous periods expired in November 2020.

Derivative Financial Instruments and Hedge Accounting. We mitigate certain financial risks, such as volatility in the price of jet fuel, adverse changes in interest rates and exchange rate fluctuations, through a controlled risk management policy that includes the use of derivative financial instruments. The derivative financial instruments are recognized in the consolidated statement of financial position at fair value. The effective portion of a cash flow hedge’s unrecognized gain or loss is recognized in “Accumulated other comprehensive income (loss) items,” while the ineffective portion is recognized in current year earnings. The realized gain or loss of derivative financial instruments that qualify as hedging is recorded in the same statements of operations as the realized gain or loss of

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the hedged item. Derivative financial instruments that are not designated as or not effective as a hedge are recognized at fair value with changes in fair value recorded in current year earnings. Outstanding derivative financial instruments may require collateral to guarantee a portion of the unsettled loss prior to maturity. The amount of collateral delivered in guarantee, which is presented as part of “Guarantee deposits,” is reviewed and adjusted on a daily basis, based on the fair value of the derivative position. As of December 31, 2021, we did not have any collateral recorded as a guarantee deposits.

(i)

Aircraft Fuel Price Risk. We account for derivative financial instruments at fair value and recognize them in the consolidated statements of financial position as an asset or liability. The cost of aircraft fuel consumed in 2019, 2020 and 2021 represented 38%, 26% and 34% (including derivative and non-derivative financial instruments) of our operating expenses, respectively. To manage aircraft fuel price risk, we periodically enter into derivatives financial instruments.

During the year ended December 31, 2021, we did not enter into new hedging positions for Jet Fuel.

During the year ended December 31, 2020, we entered into US Gulf Coast Jet Fuel 54 Asian call options designated to hedge 23,967 thousand gallons of fuel. Such hedges represented a portion of our projected consumption for the second and thirth quarter of 2020 and first quarter of 2021. Additionally, during the year ended December 31, 2020, we entered into US Gulf Coast Jet Fuel 54 Asian Zero-Cost collar options designated to hedge 81,646 thousand gallons of fuel. The latter hedges represented a portion of our projected consumption for the second quarter of 2020, second quarter and half of 2020 and second quarter of 2021.

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

Our fuel cost is referenced to US Gulf Coast Jet Fuel 54 and US West Coast Jet Fuel, which are the crudes utilized to determine the cost of the fuel provided by our suppliers. Based on our 2021 annual fuel consumption, a 5% increase in the average price per gallon of those reference prices would have increased our fuel expense for 2021 by approximately Ps.523 million.

During the year ended December 31, 2021, the Company did not enter into derivative financial instruments to hedge US Gulf Coast Jet Fuel 54 Asian call options and US Gulf Coast Jet Fuel 54 Asian Zero-Cost collar options. During the year ended December 31, 2020, the US Gulf Coast Jet Fuel 54 Asian Zero-Cost collar options were designated to hedge approximately 3% of our 2021 fuel consumption, as well as US Gulf Coast fuel 54 Asian call options to hedge approximately 3% of projected fuel consumption for 2021. During the year ended December 31, 2019, we entered into US Gulf Coast Jet Fuel 54 Asian Zero-Cost collar options designated to hedge approximately 20% of our 2020 fuel consumption, as well as US Gulf Coast fuel 54 Asian call options that expired by the end of 2019 to hedge approximately 5% of projected fuel consumption for 2019.

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

Since monthly forecasted jet fuel consumption is considered the hedged item of the “related to a transaction” type, then the time value included as accrued changes on external value in capital is considered as a “cost of hedging” under IFRS 9. The hedged item (jet fuel consumption) of the Jet fuel 54 Asian call options contracted by us represent a non-financial asset (energy commodity), which is not in our inventory. Instead, it is directly consumed by our aircraft at different airport terminals. Therefore, although a non-financial asset is involved, its initial recognition does not generate a book adjustment in our inventories. Rather, it is initially accounted for in our OCI and a reclassification adjustment is made from OCI toward the profit and loss and recognized in the same period or

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periods during which the hedged item is expected to be allocated to profit and loss (in accordance with IFRS 9.6.5.15, B6.5.29 (a), B6.5.34 (a) and B6.5.39). As of January 2015, we began to reclassify these amounts (previously recognized as a component of equity) to our statement of operations in the same period in which our expected jet fuel volume consumed affects our jet fuel purchase line item therein.

All the Company’s Asian calls matured throughout the first quarter of 2021. The Zero-Cost Collars matured throughout the second quarter of 2021, leaving no outstanding fuel position going forward as of December 31, 2021.

As of December 31, 2019 and 2020 the fair value of our outstanding US Gulf Coast Jet Fuel 54 Asian call options was Ps.0.0 million and Ps.0.2 million, respectively. During the years ended December 31, 2019, 2020 and 2021, the net negative (positive) cost of these options recycled to our fuel cost totaled Ps.61.1 million, Ps.20.6 million and Ps.12.6 million, respectively.

As of December 31, 2020, the fair value of our outstanding US Gulf Coast Jet Fuel 54 Zero-Cost collar options was Ps.(9.7) million, and these were presented as part of the financial assets and financial liabilities line items in our consolidated statements of financial position. During the years ended December 31, 2020, the net cost of these options recycled to our fuel cost totaled Ps.835.9 million, respectively. During the year ended December 31, 2021, there was no cash flow to recycle for the Zero-Cost collar position.

As of December 31, 2019, the amount of (benefit) hedge was Ps.(133.6), and was recycled to the fuel cost in 2021, as these options were expired on a monthly basis and the jet fuel was consumed. The cost of hedging derived from the extrinsic value changes of the jet fuel hedged position as of December 31, 2020 recognized in other comprehensive income totals Ps.21.7 million, respectively. During the year ended December 31, 2021, all the derivative financial instruments were effective.

For the period ended December 31, 2021, there was no cost of hedging as all the derivatives position matured all through second quarter of 2021.

(ii)

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

During the year ended December 31, 2018, the Company entered into foreign currency forward contracts in U.S. dollars to hedge approximately 20% of its next 12 months of aircraft rental expenses. A portion of the Company’s foreign currency forwards matured during the fourth quarter of 2018 (November and December), and the remainder of the Company’s outstanding position matured during the first quarter of 2019 (January).

During the year ended December 31, 2020 and 2021, the Company did not enter into foreign currency forward contracts.

Our foreign exchange exposure as of December 31, 2019, 2020 and 2021 was a net liability position of U.S. $1.7 billion, U.S. $1.7 billion and U.S. $1.6 billion, respectively.

Hedging relationships with non-derivative financial instruments.

We mitigate certain financial risks, such as volatility in the price of jet fuel, adverse changes in interest rates and exchange rate fluctuations, through risk management that includes the use of derivative financial instruments and non-derivative financial instruments.

In accordance with IFRS 9, derivative financial instruments and non-derivative financial instruments are recognized in the consolidated statement of financial position at fair value. At the inception of a hedge relationship, we formally designate and document the hedge relationship to which we wish to apply hedge accounting, as well as the risk management objective and strategy for undertaking the hedge. The documentation includes the hedging strategy and objective, identification of the hedging instrument, the hedged item or transaction, the nature of the risks being

85

hedged and how we will assess the effectiveness of changes in the hedging instrument’s fair value in offsetting the exposure to changes in the hedged item’s fair value or cash flows attributable to the hedged risks.

Only if such hedges (i) are expected to be effective in achieving offsetting changes in fair value or cash flows of the hedge items and (ii) are assessed on an ongoing basis to determine that they have been effective throughout the financial reporting periods for which they were designated, can hedge accounting treatment be used.

Under the cash flow hedge, or CFH, accounting model, the effective portion of the hedging instrument’s changes in fair value is recognized in OCI, while the ineffective portion is recognized in current year earnings in the statement of profit or loss. The cash flow hedge reserve is adjusted to the lower of the cumulative gain or loss on the hedging instrument and the cumulative change in fair value of the hedged item. The amounts recognized in OCI are transferred to earnings in the period in which the hedged transaction affects earnings. As of December 31,2020, the Company recorded the ineffective portion of Ps.448.6 million, with respect to derivative financial instruments. During the year ended December 31, 2019, there was no ineffectiveness with respect to derivative financial instruments.

The realized gain or loss of derivative financial instruments and non-derivative financial instruments that qualify as CFH are recorded in the same caption as the hedged item in the consolidated statement of operations.

As of December 31, 2021, as a result of the change in functional currency from the Mexican peso to the U.S. dollar, we concluded that these hedging strategies will no longer be effective, for which reason it accounted for the discontinuation of the hedge relationships. Accordingly, the cash flow hedge reserve in other comprehensive income at the date of the change of Ps.2,251.4 million or U.S.$109 million was reclassified to the income statement, which represented a loss within the foreign exchange gain (loss), net caption.

Please see Item 3: --“ Currency fluctuations or the devaluation and depreciation of the peso could adversely affect our business, results of operations, financial condition, and prospects”.

(iii)Interest Rate Risk. Interest rate risk is the risk that the fair value of future cash flows will fluctuate because of changes in market interest rates. Our exposure to the risk of changes in market interest rates relates primarily to our long-term debt obligations and lease obligations with floating interest rates. As of December 31, 2019, we had an outstanding hedging contract in the form of an interest rate cap with a notional amount of Ps.1.5 billion and a fair value of Ps.2.7 million. As of December 31, 2020, we had an outstanding hedging contract in the form of an interest rate cap with a notional amount of Ps.1.5 billion and a fair value of Ps.0.3 million. As of December 31, 2021, we had an outstanding hedging contract in the form of an interest rate cap with a notional amount of Ps.2.8 billion and a fair value of Ps.28.8 million. These instruments are included as assets in our consolidated statements of financial position.

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

Within one

One to five

Year

Years

Total

Interest-bearing borrowings:

Pre-delivery payment facilities

3,535,649

 

 

3,535,649

Asset backed trust note

500,000

 

2,250,000

 

2,750,000

Total

4,035,649

2,250,000

6,285,649

Deferred Taxes. Deferred taxes are recorded based on differences between the financial statement basis and tax basis of assets and liabilities and available tax loss and credit carry-forwards. In assessing our ability to realize deferred tax assets, our management considers whether it is more likely than not that some or all of the deferred tax assets will be realized. In evaluating our ability to utilize our deferred tax assets, we consider all available evidence, both positive and negative, in determining future taxable income on a jurisdiction-by-jurisdiction basis. At December 31, 2019, 2020 and 2021, we had tax loss carry-forwards amounting to Ps.1.3 billion, Ps.1.9 billion and Ps.0.3 billion, respectively. These losses relate to our and our subsidiaries’ operations on a stand-alone basis, which in conformity with current Mexican Income Tax Law may be carried forward against taxable income generated in the succeeding years in each country and may not be used to offset taxable income elsewhere in our consolidated group. During the year ended December 31, 2019, we used tax-loss carry-forwards of Ps.214.5 million. During the year ended December 31, 2020, we

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did not use any tax-loss carry-forwards. During the year ended December 31, 2021, we used tax-loss carry-forwards of Ps.1,944.9 million.

Central America (Guatemala, Costa Rica and El Salvador)

According to Guatemala corporate income tax law, under the regime on profits from business activities net operating losses cannot offset taxable income in prior or future years. For the years ended December 31, 2019, 2020 and 2021, we generated a net operating loss of Ps.1.1 million, Ps.1.8 million and Ps.0.6 million, respectively.

According to Costa Rica corporate income tax law, the tax is based on the net income earned from traffic whose origin or final destination is Costa Rica and net operating losses can offset taxable income in a term of three years. For the years ended December 31, 2019, 2020 and 2021, we generated net operating losses of Ps.50.2 million, Ps.55.8 million and Ps.122.4 million, respectively, which have not been recognized as deferred tax assets.

According to El Salvador corporate income tax law, under the regime on profits from business activities, net operating losses cannot offset taxable income in prior or future years. For the years ended December 31, 2019, 2020 and 2021, we generated a net operating loss of Ps.32.5 million, Ps.16.6 million and Ps.53.6 million, respectively.

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

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

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

For the years ended December 31, 2019, 2020 and 2021, no impairment charges were recorded in respect of our long-lived assets.

Allowance for Expected Credit Losses. An allowance for expected credit losses is established using the life-time expected credit loss approach, based on objective evidence that we will not be able to collect all amounts due according to the original terms of the receivables. At December 31, 2019, 2020 and 2021, the allowance for credit losses was Ps.40.3 million, Ps.32.7 million and Ps.12.7 million, respectively.

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Operating Revenues

2020 compared to 2021

    

For the years ended December 31, 

 

    

2020

    

2021

    

Variation

 

 

(In thousands of pesos, except for % and operating data)

Operating Revenues

Passenger revenues:

 

 

 

 

Fare revenues

12,873,174

25,703,144

12,829,970

99.7

%

Other passenger revenues

8,613,398

17,594,223

8,980,825

>100.0

%

Non-passenger revenues:

 

 

 

 

Other non-passenger revenues

882,360

1,558,092

675,732

76.6

%

Cargo

201,881

241,202

39,321

19.5

%

Non-derivative financial instruments

(411,222)

(434,522)

(23,300)

5.7

%

Total operating revenues

 

22,159,591

 

44,662,139

 

22,502,548

 

>100.0

%

Operating Data

Capacity (in ASMs in thousands)

 

18,274,946

 

28,096,701

 

9,821,755

 

53.7

%

%Load factor booked

 

80

%  

85

%  

5

pp

Booked passengers (in thousands)

 

14,712

 

24,405

 

9,675

 

65.9

%

Average passenger revenue per booked passenger

875

1,054

179

20.4

%

Average other passenger revenue per booked passenger

 

585

 

721

 

136

 

23.3

%

Average total ancillary revenue per booked passenger

 

659

 

795

 

136

 

20.6

%

Revenue passenger miles (RPMs in thousands)

 

14,596,745

 

23,802,381

 

9,205,636

 

63.1

%

Fare revenues. The increase in fare revenues in 2021 was primarily due to growth in our ASM capacity by 53.7% resulting from recovery of passenger demand in our markets, as well as our disciplined growth strategy. Additionally, our booked passengers increased 65.9%, and our average passenger revenue per booked passenger increased 20.4% year over year.

Other passenger revenues. The increase in other passenger revenues in 2021 was primarily due to higher volume of passengers electing to purchase additional services as a result of a substantial increase in customer demand.

Other non-passenger revenues. The increase in other non-passenger revenues in 2021 was primarily due to higher other services, as advertising spaces to third parties and trip insurance revenues from airport incentives recorded during 2021.

Cargo. The increase in cargo revenues in 2021 was primarily due to a higher volume of cargo operations recorded during 2021.

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2019 compared to 2020

    

For the years ended December 31, 

 

    

2019

    

2020

    

Variation

 

(In thousands of pesos, except for % and operating data)

 

Operating Revenues

Passenger revenues:

 

 

 

 

Fare revenues

23,129,991

12,873,174

(10,256,817)

(44.3)

%

Other passenger revenues

10,569,208

8,613,398

(1,955,810)

(18.5)

%

Non-passenger revenues:

 

 

 

 

Other non-passenger revenues

897,586

882,360

(15,226)

(1.7)

%

Cargo

228,836

201,881

(26,955)

(11.8)

%

Non-derivative financial instruments

(72,949)

(411,222)

(338,273)

>100.0

%

Total operating revenues

 

34,752,672

 

22,159,591

 

(12,593,081)

 

(36.2)

%

Operating Data

Capacity (in ASMs in thousands)

 

24,498,893

 

18,274,946

 

(6,223,947)

 

(25.4)

%

%Load factor booked

 

86

%  

80

%  

(6)

pp

Booked passengers (in thousands)

 

21,975

 

14,712

 

(7,263)

 

(33.1)

%

Average passenger revenue per booked passenger

1,054

875

(179)

(17.0)

%

Average other passenger revenue per booked passenger

 

481

 

585

 

104

 

21.7

%

Average total ancillary revenue per booked passenger

 

532

 

659

 

127

 

23.9

%

Revenue passenger miles (RPMs in thousands)

 

21,032,364

 

14,596,745

 

(6,435,619)

 

(30.6)

%

Fare revenues. The decrease in fare revenues in 2020 was primarily due to the significant reduction in our ASM capacity by 25.4% resulting from a substantial decrease in customer demand as a result of the impact of the COVID-19 pandemic. As a consequence, our booked passengers also decreased 33.1%, and our average passenger revenue per booked passenger decreased 17.0% year over year.

Other passenger revenues. The decrease in other passenger revenues in 2020 was primarily due to lower volume of passengers electing to purchase additional services as a result of a substantial decrease in customer demand, which in turn was a result of the impact of the COVID-19 pandemic.

Other non-passenger revenues. The decrease in other non-passenger revenues was primarily due to lower revenues from airport incentives recorded during 2020.

Cargo. The decrease in cargo revenues in 2020 was primarily due to a lower volume of cargo operations recorded during 2020.

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Operating Expenses, net

2020 compared to 2021

For the years ended December 31, 

 

    

2020

    

2021

    

Variation

 

 

(In thousands of pesos, except for %)

Other operating income

 

(730,333)

 

(217,838)

 

512,495

 

(70.2)

%

Fuel expense, net

 

6,640,820

 

12,376,263

 

5,735,443

 

86.4

%

Landing, take-off and navigation expenses

 

4,090,864

 

6,020,681

 

1,929,817

 

47.2

%

Depreciation of right of use assets

5,048,976

5,462,625

413,649

8.2

%

Salaries and benefits

 

3,453,382

 

4,857,083

 

1,403,701

 

40.7

%

Sales, marketing and distribution expenses

 

1,840,819

 

1,961,936

 

121,117

 

6.6

%

Maintenance expenses

 

1,167,720

 

1,952,202

 

784,482

 

67.2

%

Aircraft and engine variable lease expenses

 

1,845,254

 

1,686,875

 

(158,379)

 

(8.6)

%

Other operating expenses

 

1,157,240

 

1,336,792

 

179,552

 

15.5

%

Depreciation and amortization

 

898,445

 

1,159,224

 

260,779

 

29.0

%

Total operating expenses, net

 

25,413,187

 

36,595,843

 

11,182,656

 

44.0

%

Total operating expenses, net increased 44.0% in 2021 primarily as a result of growth of operations and other factors described below.

Other Operating Income. Other operating income decrease Ps.512.5 million or 70.2% in 2021, primarily due to lower sale and leaseback transactions recorded during 2021 compared to the previous year.

Fuel expense, net. The 86.4% increase in fuel expense was primarily due to increase in the average fuel cost per gallon and the fuel gallons consume of 15.0%, and 54.8%, respectively.

During the year ended December 31, 2021, the Company did not enter into new derivative financial instruments to hedge US Gulf Coast Jet Fuel 54 Asian call options and US Gulf Coast Jet Fuel 54 Asian Zero-Cost collar options, also, for the period ended December 31, 2021, there was no cost of hedging as all the derivatives position matured all through the second quarter of 2021.

Landing, Take-off and Navigation Expenses. The 47.2% increase in landing, take-off and navigation expenses in 2021 was primarily due to an increase in our departures of 57.3% and an increase in the number of airports which we operated during the year.

Depreciation of right of use assets. The 8.2% increase in depreciation of right of use assets was primarily due to the increase in our fleet size. During 2021 as we incorporated fifteen new aircraft and two spare engines to our fleet.

Salaries and Benefits. The 40.7% increase in salaries and benefits in 2021 was primarily driven of 38.5% increase in the total number of employees, higher variables compensation of our workforce due to higher operation recorded during 2021 and the annual salary increase during the year. See Item 6: “Directors, Senior Management and Employees—Employees.”.

Sales, Marketing and Distribution Expenses. The 6.6% increase was mainly due to higher marketing and distribution expenses incurred in order to growth our operating revenues.

Maintenance Expenses. The 67.2% increase in maintenance expenses in 2021 was driven by an increase in our maintenance activities resulting from the age of our fleet, which was partially offset by the appreciation of 5.6% in the average exchange rate of the peso against the U.S. dollar during 2021. Most of the maintenance expenses are denominated in U.S. dollars.

Aircraft and engine variable lease expenses. The 8.6% decrease in aircraft and engine variable expenses in 2021 was primarily due to lower supplemental rents recorded during the period. In addition we recorded an apreciation of 5.6% in the average exchange rate of the peso against the U.S. dollar. Most of these expenses are denominated in U.S. dollars.

Other Operating Expenses. The 15.5% increase in other operating expenses in 2021 was primarily the result of an increase in passenger services administrative expenses and other technology and communications expenses.

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Depreciation and Amortization. The 29.0% increase in depreciation and amortization in 2021 was primarily due to higher amortization of major maintenance events associated with the age our fleet. The cost of the major maintenance events is accounted for under the deferral method. During 2020 and 2021, we recorded amortization of major maintenance lease hold improvements of Ps.652.1 million and Ps.838.4 million, respectively.

2019 compared to 2020

    

For the years ended December 31, 

 

    

2019

    

2020

    

Variation

 

 

(In thousands of pesos, except for) %)

Other operating income

 

(327,208)

 

(730,333)

 

(403,125)

 

>100.0

%

Fuel expense, net

 

11,626,069

 

6,640,820

 

(4,985,249)

 

(42.9)

%

Landing, take-off and navigation expenses

 

5,108,489

 

4,090,864

 

(1,017,625)

 

(19.9)

%

Depreciation of right of use assets

4,702,971

5,048,976

346,005

7.4

%

Salaries and benefits

 

3,600,762

 

3,453,382

 

(147,380)

 

(4.1)

%

Sales, marketing and distribution expenses

 

1,447,637

 

1,840,819

 

393,182

 

27.2

%

Maintenance expenses

 

1,488,431

 

1,167,720

 

(320,711)

 

(21.5)

%

Aircraft and engine variable lease expenses

 

961,657

 

1,845,254

 

883,597

 

91.9

%

Other operating expenses

 

1,112,927

 

1,157,240

 

44,313

 

4.0

%

Depreciation and amortization

 

675,514

 

898,445

 

222,931

 

33.0

%

Total operating expenses, net

 

30,397,249

 

25,413,187

 

(4,984,062)

 

(16.4)

%

Total operating expenses, net decreased 16.4% in 2020 primarily as a result of decrease of operations and other factors described below.

Other Operating Income. Other operating income increased Ps.403.1 million or more than 100.0% in 2020, primarily due to higher sale and leaseback gains recorded during 2020 compared to the previous year as a result of the adoption of IFRS 16.

Fuel expense, net. The 42.9% decrease in fuel expense was primarily as a result of a decrease in the average fuel cost per gallon of 14.0% and a decrease in fuel gallons consumed of 29.8% which, in turn, was primarily due to the significant 29.2% decrease in departures as a result of the substantial decrease in customer demand due to the impact of the COVID-19 pandemic.

During the years ended December 31, 2019 and 2020, we entered into US Gulf Coast Jet Fuel 54 Asian Zero Cost collar options and Asian call options contracts. These instruments also qualify for hedge accounting. As a result, during 2020, their intrinsic value loss of Ps.856.5 million was recycled to the cost of fuel.

Landing, Take-off and Navigation Expenses. The 19.9% decrease in landing, take-off and navigation expenses in 2020 was primarily due to a decrease in our operations as measured by number of departures by 29.2%, as a result of the substantial decrease in customer demand, which in turn was a result of the impact of the COVID-19 pandemic.

Depreciation of right of use assets. The 7.4% increase in depreciation of right of use assets in 2020 was primarily due to an increase in our fleet (lease agreements), as we incorporated four new net aircraft leases and eight new net engine leases during 2020.

Salaries and Benefits. The 4.1% decrease in salaries and benefits in 2020 was primarily the result of a decrease in employee salaries as result of reduced flight operations and cost-cutting measures in response to the COVID-19 pandemic. Additionally, the variable compensation of our workforce decreased also due to lower operations recorded during 2020, as well as the accounting accrual impact related to our management retention plans. See Item 6: “Directors, Senior Management and Employees—Employees.”

Sales, Marketing and Distribution Expenses. The 27.2% increase in sales, marketing and distribution expenses was mainly due to a one-time VAT expense of Ps.746 million resulting from an adjustment on the northern border VAT rate, which was partially offset by a decrease in our marketing and distribution expenses as a result of the COVID-19 pandemic and the related decrease in customer demand.

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Maintenance Expenses. The 21.5% decrease in maintenance expenses in 2020 was mainly due to lower maintenance expenses as result of reduced operations due to the COVID-19 pandemic, which was partially offset by the depreciation of 11.6% in the average exchange rate of the peso against the U.S. dollar during 2020 since some of these maintenance expenses are denominated in U.S. dollars.

Aircraft and engine variable lease expenses. The 91.9% increase in aircraft and engine variable expenses in 2020 was primarily due to an increase in redelivery expenses and the depreciation of 11.6% in the average exchange rate of the peso against the U.S. dollar, since the majority of these expenses are denominated in U.S. dollars.

Other Operating Expenses. The 4.0% increase in other operating expenses in 2020 was primarily the result of our purchase of additional insurance to cover flight equipment. Additionally, during 2020, other operating expenses on a dollar basis increased due to the depreciation of 11.6% in the average exchange rate of the peso against the U.S. dollar during 2020, since some of these expenses are denominated in U.S. dollars.

Depreciation and Amortization. The 33.0% increase in depreciation and amortization in 2020 was primarily due to higher amortization of major maintenance events associated with the aging of our fleet. The cost of the major maintenance events is accounted for under the deferral method. During 2019 and 2020, we recorded amortization of major maintenance leasehold improvements of Ps.450.4 million and Ps.652.1 million, respectively.

Operating Results

2020 compared to 2021

    

For the years ended December 31, 

    

2020

    

2021

    

Variation

(In thousands of pesos, except for %)

Operating Results

Total operating revenues

22,159,591

44,662,139

22,502,548

>100.0

%

Total operating expenses, net

25,413,187

36,595,843

11,182,656

44.0

%

Operating (loss) income

(3,253,596)

8,066,296

11,319,892

n/a

Operating (Loss) income. As a result of the factors outlined above, our operating income was Ps.8,066 million in 2021, as compared to our operating loss of Ps.(3,254) million in 2020.

2019 compared to 2020

    

For the years ended December 31, 

 

    

2019

    

2020

    

Variation

 

 

(In thousands of pesos, except for %)

Operating Results

Total operating revenues

 

34,752,672

 

22,159,591

 

(12,593,081)

 

36.2

%

Total operating expenses, net

 

30,397,249

 

25,413,187

 

(4,984,062)

 

(16.4)

%

Operating income (loss)

 

4,355,423

 

(3,253,596)

 

(7,609,019)

 

(100)

%

Operating Income (loss). As a result of the factors outlined above, our operating loss was Ps.(3,254) million in 2020, as compared to our operating income of Ps.4,355 million in 2019.

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