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

Controladora Vuela Compañía de Aviación, S.A.B. de C.V. provides air transportation and related services.

The company operates up to 590 average daily flight segments on routes that connect 43 cities in Mexico, 22 cities in the United States, four cities in Central America and two cities in South America. The company has substantial market presence in the top five airports in Mexico (based on number of passengers): Cancun, Guadalajara, Mexico City, Monterrey and Tijuana. The main U.S. cities the company serves are home to some of the most populous Mexican communities in the United States based on data from the Pew Hispanic Research Center. The company seeks to replicate its 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, the company signed a codeshare agreement with U.S. ULCC Frontier Airlines Inc. (Frontier). The company expects 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, the company serves 22 destinations in the United States and 43 in Mexico, of which 15 coincide with Frontier destinations in both countries.

Through its subsidiaries Vuela Aviación, S.A. (Vuela Aviación) and Vuela El Salvador, S.A. de C.V. (Vuela El Salvador), the company holds concessions, which authorize it to provide regular passenger, cargo and mail air transportation services in Costa Rica and El Salvador.

Concesionaria Vuela Compañía de Aviación, S.A.P.I. de C.V. (Volaris Opco) is the company's airline operating subsidiary in Mexico and the United States. Comercializadora Volaris, S.A. de C.V. (Comercializadora) is primarily engaged in marketing, advertising and other commercial matters. Viajes Vuela, S.A. de C.V. (Viajes Vuela) performs travel agency services. Comercializadora V. Frecuenta, S.A. de C.V. (Comercializadora V. Frecuenta) has not started operations and may be engaged in providing air travel-related ancillary services. These subsidiaries are incorporated in Mexico.

Mexican Regulation

Aircraft

Through its subsidiary Volaris Opco, the company holds the Concession, which authorizes it to provide domestic regular passenger, cargo and mail air transportation services within Mexico; a permit for domestic charter air transportation passenger services; and a permit for international regular passenger and charter passenger air transportation services.

The company's Concession was granted by the Mexican federal government through SICT (means the Mexican Infrastructure, Communications and Transportation Ministry (Secretaría de Infraestructura, Comunicaciones y Transportes)) on May 9, 2005. On February 24, 2020, the company's Concession was extended for a 20-year term starting on May 9, 2020. The Concession authorizes the company to use certain aircraft and certain routes. Pursuant to the terms of the Mexican Aviation Law, the company's Concession, together with specific authorizations granted to it by the AFAC, allow the company to provide domestic and international regular air transportation services.

Pursuant to the Mexican Aviation Law and the company's Concession, all the aircraft used to provide the company's 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 the company's fleet as of December 31, 2021, had been authorized by and registered with the AFAC (Mexican Federal Civil Aviation Agency (Agencia Federal de Aviación Civil)).

Routes

Domestic routes are subject to the company's Concession and the Mexican Aviation Law (Ley de Aviación Civil). International routes to the United States are subject to its Concession, the international routes authorization permits issued by the AFAC, the Mexican Aviation Law and the U.S.A. Mexico Bilateral Air Transport Agreement dated December 18, 2015, pursuant to which the company was granted a general exemption from the DOT (the U.S. Department of Transportation) to allow it to operate any route into the United States.

Environmental Regulation

The company is 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 SICT3 2000 which regulates the maximum limits of the aircraft noise emissions, as well as the requirements to comply with such limits.

Labor Regulation

The company is 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.

The U.S. and International Regulation

Operational Regulation

The company holds a Foreign Air Carrier Permit issued by the DOT that authorizes it to engage in scheduled air transportation of passengers, property and mail between Mexico and the United States.

As of the date of this annual report, the company had FAA airworthiness certificates for 42 of its aircraft (the remainder being registered with the AFAC in Mexico), the company had obtained the necessary FAA authority to fly to all the cities it serves, and all its aircraft had been certified for over-water operations.

The company holds all necessary operating and airworthiness authorizations, certificates and licenses and operate in compliance with applicable DOT and FAA regulations, interpretations and policies.

International Regulation

The company's service to the United States is also subject to CBP (the U.S. Customs and Border Protection) (a law enforcement agency that is part of the DHS), immigration and agriculture requirements and the requirements of equivalent foreign governmental agencies.

The company's flight operations are also subject to Animal and Plant Health Inspection Service, or APHIS (an agency of the U.S. Department of Agriculture) requirements. The company complies with all APHIS cargo requirements and regulations related to its flights.

Other Regulations

In the United States, the company is subject to certain provisions of the Communications Act of 1934, as amended, and are required to obtain an aeronautical radio license from the FCC.

Growth Strategy

The key elements of the company's growth strategy are to remain the ULCC (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) of choice; grow non-passenger revenue while maintaining low base fare to stimulate demand; grow by stimulating demand in its existing markets; continue its disciplined fleet growth; and grow passenger volume by profitably establishing new routes.

The company's international growth strategy has focused on targeting markets in the United States with large Mexican and Latin-American communities in order to stimulate VFR (passengers who are visiting friends and relatives) demand and leisure traffic in those markets.

Operations

Passenger Revenues

VFR traffic makes up the largest component of the company's customers and its VFR customers are the most cost conscious and time/schedule flexible of all of its travelers. VFR and leisure, the second largest component of the company's customers, are stronger during the summer, Christmas and New Year season, followed by Easter and responds well to demand stimulation based on low fares. Cost-conscious business travelers make up the third largest component of the company's customers.

The most significant passenger revenue includes revenues generated from fare revenue and other passenger revenues. Other passenger services include, but are not limited to, fees for excess baggage, bookings through the call center or third-party agencies, advanced seat selection, itinerary changes and charters. These fees are recognized as revenue when the obligation of passenger transportation service is provided or when the non-refundable ticket expires on the date of the scheduled travel. The company also makes trip insurance by third parties available through its website. The company recognizes revenue from V-Club and other similar services as other passenger revenues, when the service is provided.

on January 23, 2023, through its subsidiary Concesionaria, the company entered into an agreement with Lealtad Mercadotecnia y Conocimientos Agregados, S.A.P.I. de C.V., or the Supplier, a subsidiary of Fomento Económico Mexicano, S.A.B. de C.V., or FEMSA. Pursuant to such contract, Concesionaria became a participating company in the loyalty program, or the Program, established and managed by the Supplier.

Non-Passenger Revenues

The most significant non-passenger revenues include revenues generated from revenues from other non-passenger services and cargo services. Revenues from other non-passenger services mainly include, but are not limited to, commissions charged to third parties for the sale of trip insurance, rental cars, and advertising spaces to third parties. These revenues, as well as cargo services, are recognized as revenue at the time the service is provided.

The company makes efficient use of extra capacity in its aircraft by carrying cargo on its passenger flights. The company offers cargo transportation services on all domestic routes. The company outsourced all ground cargo handling services, including storage, to several third-party providers and the related cost of such services are paid by its cargo customers. The company offers services include reception, check-in, shipping and delivery to the final destination. It also offers charter services.

The company also generates revenues from the Volaris affinity credit card, or Volaris INVEX, from multiple revenue streams, including by charging a small fee for purchases made with the card and electronic credit redemptions earned through credit card purchases.

Route Network

The company serves 71 cities throughout Mexico, the United States, Central and South America. It operates up to 590 average daily segments on routes that connect 43 cities in Mexico and 28 cities in the United States and Central and South America.

The company's 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 its point-to-point strategy and route network, the company offers direct flights between cities with high traffic volumes.

Sales, Distribution, Marketing and Advertising

Sales, Distribution

The company sells its products through four primary distribution channels: its website and mobile app; its call center; airports; and third parties, such as travel agents.

The company's website is its primary platform for ticket sales. Sales through the company's website and mobile app represent its lowest cost distribution channel, and it is the channel through which it offers its lowest fares.

Marketing and Advertising

The company's marketing and advertising efforts include the use of the internet, television, radio and billboards. The company focuses on direct consumer marketing in its targeted markets, by offering promotional fares and maintaining a strong presence in digital media, such as Facebook, Twitter, Google, Instagram, YouTube and TikTok. As of December 31, 2022, the company had approximately 4.8 million fans on Facebook, 2.0 million followers on Twitter, 543.7 thousand followers on Instagram, 47.2 thousand subscribers on YouTube and 45.5 thousand followers on TikTok, which the company primarily uses for marketing, customer service and promotion.

The company reaches its customers directly by holding promotional events that build brand recognition. The company also advertises on billboards, in venues that its core consumers frequently attend, radio, television and shopping malls. The company has internet promotions directed at customers, who can register on its website. In addition, the company send emails with promotions and advertisement to approximately 1.4 million e-mail addresses on a weekly basis.

V-Club, the company's annual subscription-based service, grants members exclusive first access to its lowest fares offerings. In addition, it provides members with guaranteed member-only fare sales and exclusive offers on hotels, rental cars and other travel necessities with YaVas. V-Club members may access their benefits through the company's website and its mobile app. As of December 31, 2022, the company had approximately 756,000 V-Club members.

The company offers two types of Volaris INVEX: the Volaris INVEX 0 and the Volaris INVEX 2.0. It also offers individual V-Club and LoungeKey memberships at no cost.

Fleet

As of December 31, 2022, the company flew only Airbus A320 family aircraft, which provides it 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 the company's aircraft while decreasing training, maintenance, spare parts inventory and other operational costs.

In December 2017, the company entered into an agreement with Airbus (Airbus S.A.S.) to purchase 80 aircraft (46 A320neo and 34 A321neo), which Airbus committed to deliver between 2022 and 2026.

In 2020, the company amended the agreement with Airbus to reschedule the delivery of 98 aircraft from the order placed in December 2017 and the previous order between 2020 and 2028.

In November 2021, the company entered into a new amendment to the agreement with Airbus to purchase 39 additional A320neo family aircraft which Airbus committed to deliver between 2023 and 2029. The new order includes 39 A321neo.

In October 2022, the company entered into a new amendment to the agreement with Airbus to purchase 25 additional A320neo family aircraft which Airbus committed to deliver in 2030. The new order includes 25 A321neo.

As of December 31, 2022, the company's fleet of 117 Airbus narrow-body aircraft consisted of four Airbus A319s (including one owned), 88 A320s (48 of them are New Engine Option (NEO)) and 25 A321s (15 of them are NEO).

As of December 31, 2022, the company had 116 aircraft leased pursuant to long-term lease agreements for an average term of 12.14 years. The operating leases for these aircraft expire between 2023 and 2034.

As of December 31, 2022, the purchase agreement with Airbus required the company to accept delivery of 144 Airbus A320 family aircraft in the next eight years (from January 2023 to October 2030). The agreement provides for the addition of 144 aircraft to the company's fleet as follows: five in 2023, 17 in 2024, 16 in 2025, 27 in 2026, 21 in 2027, 19 in 2028, 14 in 2029 and 25 in 2030.

Additionally, during December 2017, the company entered into an agreement with Airbus to purchase 80 aircraft, which Airbus committed to deliver between 2022 and 2026. The new order includes 46 A320neo and 34 A321neo.

The company has four scheduled A319 aircraft returns in the next four years: one in 2023, two in 2024 and one in 2025. Additionally, as of December 31, 2022, the company had 32 A320 aircraft returns in the next four years: four in 2024, 12 in 2025 and 16 in 2026. The company also has eight A321 aircraft scheduled to be delivered in the next four years, one in 2024 and seven in 2026.

Maintenance

Line maintenance is performed by the company's qualified technicians, under its repair station certificates issued by the U.S. Federal Aviation Administration (FAA) and AFAC and by maintenance providers that hold the necessary certifications.

The company has entered into a long-term flight hour agreement with International Aero Engines AG (IAE) and Pratt & Whitney (P&W) for its engine overhaul services and Lufthansa Technik AG on a power-by-hour basis for component services. The company contracts with Lufthansa Technik AG for certain technical services and Aeroman for its heavy airframe maintenance. Aeroman is a FAA-approved maintenance provider.

Fuel

The company purchases fuel in Mexico from Airports and Auxiliary Services (Aeropuertos y Servicios Auxiliares), or ASA, who is also in charge of supplying it directly to the company's aircraft in Mexico. The company purchases its fuel outside of Mexico under fuel supply service contracts with World Fuel Services, AvFuel, Shell, BP Products North America, Chevron, Associated Energy Group, Puma Energy Group, and Terpel.

Concession and Permits

Through its subsidiary Volaris Opco, the company holds the Concession, which authorizes it to provide domestic regular passenger, cargo and mail air transportation services within Mexico; a permit for domestic charter air transportation passenger services; and a permit for international regular passenger and charter passenger air transportation services.

The company's Concession was granted by the Mexican federal government through SICT on May 9, 2005. On February 24, 2020, the company' Concession was extended for a 20-year term starting on May 9, 2020. The Concession authorizes the company to use certain aircraft and certain routes. Pursuant to the terms of the Mexican Aviation Law, the company's Concession, together with specific authorizations granted to it by the AFAC, allow it to provide domestic and international regular air transportation services.

Competition

The company's U.S.-based publicly traded target market competitors, including Alaska (Alaska Air Group, Inc.), American (American Airlines Group), Delta (Delta Air Lines, Inc.), Jet Blue, Southwest (Southwest Airlines Co.), Frontier, Spirit (Spirit Airlines, Inc.), Allegiant (Allegiant Travel Company) and United (United Airlines Holdings, Inc.).

The company's main competitors in Mexico are Grupo Aeromexico (Grupo Aeroméxico, S.A.B. de C.V., which includes Aeroméxico and Aeroméxico Connect) and VivaAerobus (Aeroenlaces Nacionales, S.A. de C.V.). Internationally, the company competes with Grupo Aeromexico, Viva Aerobus and many U.S.-based carriers, including Alaska, American, Delta and United. In the Mexico - Central America market the company's main competitors are Grupo Aeromexico and Avianca, while in the Central America - the U.S. market the company's main competitors are Avianca (Avianca Holdings S.A.) and Delta. In the Mexico - South America market the company's main competitors are Grupo Aeromexico, Viva Aerobus and LATAM (LATAM Airlines Group S.A.).

History

Controladora Vuela Compañía de Aviación, S.A.B. de C.V. was founded in 2005. The company was incorporated in Mexico in accordance with Mexican Corporate laws in 2005.