United states securities and exchange commission

Foreign currency risk is the risk that the fair value of future cash flows will fluctuate because of changes in foreign exchange rates. The Company’s exposure to the risk of changes in foreign exchange rates relates primarily to the Company’s operating activities; when revenue or expense is denominated in a different currency from the Company’s functional currency (including the amounts payable arising from U.S. dollar denominated expenses and U.S. dollars linked expenses and payments). To mitigate this risk, the Company may use foreign exchange derivative financial instruments.

 

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Most of the Company’s revenue is generated in Mexican pesos, although 33% of its revenues came from operations in the United States of America and Central America for the year ended at December 31, 2016 (31% at December 31, 2015) and U.S. dollar denominated collections accounted for 38% and 36% of the Company’s total collections in 2016 and 2015, respectively. However, certain of its expenditures, particularly those related to aircraft leasing and acquisition, are also U.S. dollar denominated. In addition, although jet fuel for those flights originated in Mexico are paid in Mexican pesos, the price formula is impacted by the Mexican peso /U.S. dollar exchange rate.

The Company’s foreign exchange on and off-balance sheet exposure as of December 31, 2016 and 2015 is as set forth below:

 

		Thousands of U.S. dollars
		2016				2015
Assets:
Cash and cash equivalents		US$	297,565			US$	202,022
Other accounts receivable			11,619				5,286
Aircraft maintenance deposits paid to lessors			343,787				286,012
Deposits for rental of flight equipment			30,025				36,331
Derivative financial instruments			41,996				4,575
Total assets			724,992				534,226
Liabilities:
Financial debt (Note 5)			76,789				92,466
Foreign suppliers			56,109				40,673
Taxes and fees payable			6,874				7,705
Derivative financial instruments			684				3,242
Total liabilities			140,456				144,086
Net foreign currency position		US$	584,536			US$	390,140

At April 26, 2017, date of issuance of these financial statements, the exchange rate was 18.6521 per U.S. dollar.

 

		Thousands of U.S. dollars
		2016				2015
Off-balance sheet transactions exposure:
Aircraft and engine operating lease payments (Note 14)		US$	1,727,644			US$	1,216,799
Aircraft and engine commitments (Note 23)			315,326				353,528
Total foreign currency		US$	2,042,970			US$	1,570,327

During the year ended on December 31, 2016 and 2015, the Company did not enter into foreign exchange rate derivatives financial instruments.

 

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c)	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. The Company’s exposure to the risk of changes in market interest rates relates primarily to the Company’s long-term debt obligations and flight equipment operating lease agreements with floating interest rates.

The Company’s results are affected by fluctuations in certain benchmark market interest rates due to the impact that such changes may have on operational lease payments indexed to the London Inter Bank Offered Rate (“LIBOR”). The Company uses derivative financial instruments to reduce its exposure to fluctuations in market interest rates and accounts for these instruments as an accounting hedge. In general, when a derivative can be defined within the terms and cash flows of a leasing agreement, this may be designed as a CFH and the effective portion of fair value variations are recorded in equity until the date the cash flow of the hedged lease payment is recognized in the consolidated statements of operation.

At December 31, 2016 and 2015, the Company had outstanding hedging contracts in the form of interest rate swaps with notional amount of US$70,000 and fair value of Ps.14,144 and Ps.55,774, respectively, recorded in liabilities. For the years ended December 31, 2016, 2015 and 2014, the reported loss on the interest rate swaps was Ps.48,777, Ps.46,545 and Ps.39,610, respectively, which was recognized as part of rental expense in the consolidated statements of operations.

The following table illustrates the sensitivity of financial instruments on the Company’s accumulated other comprehensive income (due to changes in the fair value of forward contracts) to a reasonably possible change in LIBOR interest rates. The calculations are based on financial instruments held at each consolidated statement of financial position date and were made increasing (decreasing) 100 basis points to the LIBOR curve. All other variables were held constant.

 

		Position at December, 31, 2016 effect on equity (thousands of U.S. dollars)
Increase (decrease) in curve
+100 basis points		US$	1.04
- 100 basis points			(1.05	)

 

d)	Liquidity risk