Avianca Holdings S.A.

Transcription

1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC FORM 6-K REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16 OF THE SECURITIES EXCHANGE ACT OF 1934 For the month of November, 2017 Commission File Number Avianca Holdings S.A. (Translation of registrant s name into English) Aquilino de la Guardia Calle No. 8, Panama City, Republic of Panama (+507) (Address of principal executive offices) Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F. Form 20-F Form 40-F Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):

2 Avianca Holdings S.A. informs that it has published on its website its interim condensed consolidated financial statements for the nine months ended September 30, Enclosures: Exhibit 99.1 Interim Condensed Consolidated Financial Statements for the nine months ended September 30, The original source-language text of this announcement is the official, authoritative version. Translations are provided as an accommodation only, and should be crossreferenced with the source-language text, which is the only version of the text intended to have legal effect. About Avianca Holdings S.A. Avianca Holdings S.A. (NYSE: AVH) (BVC:PFAVH) comprises the airlines: Aerovías del Continente Americano S.A. Avianca, Tampa Cargo S.A., incorporated in Colombia, Aerolineas Galapagos S.A. Aerogal, incorporated in Ecuador, and the TACA Group companies: TACA International Airlines S.A., incorporated in El Salvador, Lineas Aereas Costarricenses S.A. LACSA, incorporated in Costa Rica, Transamérican Airlines S.A. TACA Perú, incorporated in Perú, Servicios Aéreos Nacionales S.A. SANSA, incorporated in Costa Rica, Aerotaxis La Costeña S.A., incorporated in Nicaragua, and Isleña de Inversiones S.A. de C.V. ISLEÑA, incorporated in Honduras. Investor Relations Office

3 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: November 14, 2017 AVIANCA HOLDINGS S.A. By: /s/ Renato Covelo Name: Renato Covelo Title: Vice President Senior General Counsel

4 Exhibit 99.1 AVIANCA HOLDINGS S.A. AND SUBSIDIARIES Interim Condensed Consolidated Financial Statements As of September 30, 2017 and 2016 and for the nine months ended September 30, 2017 and 2016

5 Index Interim Condensed Consolidated Statement of Financial Position 3 Interim Condensed Consolidated Statement of Comprehensive Income 5 Interim Condensed Consolidated Statement of Changes in Equity 7 Interim Condensed Consolidated Statement of Cash Flows

6 Interim Condensed Consolidated Statement of Financial Position Notes As of September 30, 2017 (Unaudited) As of December 31, 2016 (Audited) Assets Current assets: Cash and cash equivalents 8 $ 515,401 $ 375,753 Restricted cash 8 7,272 5,371 Accounts receivable, net of provision for doubtful accounts 9 359, ,868 Accounts receivable from related parties 10 19,843 19,283 Expendable spare parts and supplies, net of provision for obsolescence 101,997 82,362 Prepaid expenses 80,151 59,725 Deposits and other assets , ,124 Total current assets 1,268,676 1,016,486 Non-current assets: Available-for-sale securities Deposits and other assets , ,033 Accounts receivable, net of provision for doubtful accounts 9 142,482 92,048 Intangible assets 416, ,918 Deferred tax assets 13,778 5,845 Property and equipment, net 12 4,732,484 4,649,929 Total non-current assets 5,415,311 5,334,849 Total assets $ 6,683,987 $ 6,351,335 See accompanying notes to Interim Condensed Consolidated Financial Statements 3

7 Interim Condensed Consolidated Statement of Financial Position Notes As of September 30, 2017 (Unaudited) As of December 31, 2016 (Audited) Liabilities and equity Current liabilities: Current portion of long-term debt 13 $ 481,527 $ 406,739 Accounts payable 586, ,106 Accounts payable to related parties 10 3,406 9,072 Accrued expenses 143, ,797 Provisions for legal claims 22 15,817 18,516 Provisions for return conditions 28,042 53,116 Employee benefits 39,270 39,581 Air traffic liability 642, ,190 Other liabilities 13,035 11,085 Total current liabilities 1,954,059 1,691,202 Non-current liabilities: Long-term debt 13 2,983,817 2,867,496 Accounts payable 7,110 2,734 Provisions for return conditions 150, ,822 Employee benefits 118, ,569 Deferred tax liabilities 24,430 20,352 Air traffic liability 97,905 98,088 Other liabilities non-current 15,341 14,811 Total non-current liabilities 3,397,423 3,239,872 Total liabilities 5,351,482 4,931,074 Equity: Common stock 82,600 82,600 Preferred stock 42,023 42,023 Additional paid-in capital on common stock 234, ,567 Additional paid-in capital on preferred stock 469, ,273 Retained earnings and OCI reserves 548, ,681 Revaluation and other reserves 27,365 27,365 Total equity attributable to the Company 1,404,222 1,400,509 Non-controlling interest (71,717) 19,752 Total equity 1,332,505 1,420,261 Total liabilities and equity $ 6,683,987 $ 6,351,335 See accompanying notes to Interim Condensed Consolidated Financial Statements 4

8 Interim Condensed Consolidated Statement of Comprehensive Income (In USD thousands, except share and per share data) For the nine months ended September 30, Notes (Unaudited) Operating revenue: Passenger $ 2,669,061 $ 2,413,119 Cargo and other 651, ,197 Total operating revenue 4 3,320,750 3,033,316 Operating expenses: Flight operations 44,538 42,742 Aircraft fuel 694, ,903 Ground operations 339, ,398 Aircraft rentals 226, ,809 Passenger services 126, ,072 Maintenance and repairs 223, ,190 Air traffic 175, ,023 Sales and marketing 392, ,129 General, administrative and other 122, ,993 Salaries, wages and benefits 518, ,599 Depreciation and amortization 219, ,279 Total operating expenses 3,083,388 2,852,137 Operating profit 237, ,179 Interest expense (132,485) (131,765) Interest income 4,963 10,666 Derivative instruments (2,211) 4,785 Foreign exchange 6 (16,506) (39,836) Profit before income tax 91,123 25,029 Income tax expense current 20 (28,023) (19,582) Income tax expense deferred 4,200 12,382 Total income tax expense (23,823) (7,200) Net profit for the period $ 67,300 $ 17,829 Basic and diluted earnings per share 14 Common stock $ 0.07 $ 0.02 Preferred stock $ 0.07 $ 0.02 See accompanying notes to Interim Condensed Consolidated Financial Statements 5

9 Interim Condensed Consolidated Statement of Comprehensive Income (In USD thousands, except share and per share data) For the nine months ended September 30, Notes (Unaudited) Net profit for the period $ 67,300 $ 17,829 Other comprehensive income (loss): Items that will not be reclassified to profit or loss in future periods: 15 Actuarial losses (9,302) (40,523) Income tax (422) 3,997 (9,724) (36,526) Items that will be reclassified to profit or loss in future periods: 15 Effective portion of changes in fair value of hedging instruments 1,154 3,974 Net change in fair value of available-for-sale securities 272 Income tax (3,883) 1, Other comprehensive income (loss), net of income tax (8,298) (36,435) Total comprehensive income (loss) net of income tax 59,002 (18,606) Profit attributable to: Equity holders of the parent 37,769 (1,621) Non-controlling interest 29,531 19,450 Net profit for the period 67,300 17,829 Total comprehensive income (loss) attributable to: Equity holders of the parent 29,471 (38,056) Non-controlling interest 29,531 19,450 Total comprehensive (loss) income for the period $ 59,002 $ (18,606) See accompanying notes to Interim Condensed Consolidated Financial Statements 6

10 Interim Condensed Consolidated Statement of Changes in Equity (In USD thousands, except share and per share data) Common stock Preferred stock Notes Shares Amount Shares Amount For the nine months ended September 30, 2017 Additional paid-in capital Equity attributable Common stock Preferred stock Revaluation and other reserves Retained earnings and OCI reserves to equity holders of the parent Noncontrolling interest Balance at December 31, 2016 (audited) 660,800,003 $82, ,187,285 $42,023 $234,567 $469,273 $ 27,365 $544,681 $1,400,509 $ 19,752 $1,420,261 Net profit 37,769 37,769 29,531 67,300 Other comprehensive income for the period 15 (8,298) (8,298) (8,298) Dividends paid 25 (25,758) (25,758) (121,000) (146,758) Balance at September 30, 2017 (unaudited) 660,800,003 $82, ,187,285 $42,023 $234,567 $469,273 $ 27,365 $548,394 $1,404,222 $ (71,717) $1,332,505 Total equity See accompanying notes to Interim Condensed Consolidated Financial Statements 7

11 Interim Condensed Consolidated Statement of Changes in Equity (In USD thousands, except share and per share data) Common stock Preferred stock Notes Shares Amount Shares Amount For the nine months ended September 30, 2016 Additional paid-in capital Common stock Preferred stock Revaluation and other reserves Retained earnings and OCI reserves Equity attributable to equity holders of the parent Non- Controlling interest Balance at December 31, 2015 (audited) 660,800,003 $82, ,187,285 $42,023 $234,567 $469,273 $ 18,394 $507,132 $ 1,353,989 $ 18,646 $1,372,635 Net loss (1,621) (1,621) 19,450 17,829 Other comprehensive income for the period 15 (36,435) (36,435) (36,435) Dividends paid 25 (5,723) (5,723) (20,100) (25,823) Balance at September 30, 2016 (unaudited) 660,800,003 $82, ,187,285 $42,023 $234,567 $469,273 $ 18,394 $463,353 $ 1,310,210 $ 17,996 $1,328,206 Total equity See accompanying notes to Interim Condensed Consolidated Financial Statements 8

12 Interim Condensed Consolidated Statement of Cash Flows For the nine months ended September 30, (Unaudited) Cash flows from operating activities: Net profit for the period $ $ 17,829 Adjustments for: Depreciation and amortization 219, ,279 Share-based payment income (expense) (978) 283 Earnings on disposal of assets (2,215) (1,473) Fair value adjustment of financial instruments 3,476 (5,400) Interest income (4,963) (10,666) Interest expense 132, ,765 Deferred tax (4,200) (12,382) Current tax 28,023 19,582 Foreign exchange 16,506 39,836 Changes in: Accounts receivable (112,369) (58,969) Expendable spare parts and supplies (19,635) (10,352) Prepaid expenses (20,426) (2,466) Deposits and other assets 41,222 14,766 Accounts payable and accrued expenses 67,311 (13,656) Air traffic liability 121,353 91,604 Provisions for return conditions 4,375 14,339 Employee benefits (9,961) (6,981) Income tax paid (30,609) (29,587) Net cash flows provided by operating activities 495, ,351 Cash flows from investing activities: Available-for-sale securities 85 Restricted cash (2,192) 1,928 Interest received 3,387 7,029 Advance payments on aircraft purchase contracts (100,532) (56,461) Acquisition of property and equipment (217,000) (164,731) 9

13 Interim Condensed Consolidated Statement of Cash Flows For the nine months ended September 30, (Unaudited) (Investment) redemption of certificates of bank deposits (2,701) 58,680 Acquisition of intangible assets (18,953) (11,054) Proceeds from sale of property and equipment 137, ,960 Sale of investments 425 (10) Net cash flows used in investing activities (200,287) (37,659) Cash flows from financing activities: Proceeds from new loans and borrowings 351,461 20,207 Repayments of loans and borrowings (273,598) (288,906) Dividends paid (25,758) (5,723) Dividends paid to minority shareholding (121,000) (20,100) Interest paid (97,867) (106,394) Net cash flows used in financing activities (166,762) (400,916) Net increase (decrease) in cash and cash equivalents 128,719 (67,224) Net foreign exchange difference 10,929 (1,006) Cash and cash equivalents at beginning of period 375, ,381 Cash and cash equivalents at end of period $ 515,401 $ 411,151 10

14 (1) Reporting entity Avianca Holdings S.A. (the Company or Avianca Holdings S.A. ), a Panamanian corporation whose registered address is at Calle Aquilino de la Guardia No. 8 IGRA Building, Panama City, Republic of Panama, was incorporated on October 5, 2009 under the name SK Holdings Limited and under the laws of the Commonwealth of the Bahamas. Subsequently, the Company changed its corporate name as follows: on March 10, 2010 to AviancaTaca Limited, on January 28, 2011 to AviancaTaca Holding S.A. and on March 3, 2011 the Company changed its registered offices to Panama. In 2011 AviancaTaca listed its shares in the Bolsa de Valores de Colombia ( BVC ) and was listed as PFAVTA: CB. On March 21, 2013, the Company changed its legal name from AviancaTaca Holding S.A. to Avianca Holdings S.A. and its listing name to PFAVH: CB. On November 6, 2013, the Company listed its shares in the New York Stock Exchange (NYSE) and is listed as AVH. The Company through its subsidiaries is a provider of domestic and international, passenger and cargo air transportation, both in the domestic markets of Colombia, Ecuador, Costa Rica, Nicaragua and Peru and international routes serving North, Central and South America, Europe, and the Caribbean. The Company has entered into a number of bilateral code share alliances with other airlines (whereby selected seats on one carrier s flights can be marketed under the brand name and commercial code of the other), expanding travel choices to customers worldwide. Marketing alliances typically include: joint frequent flyer program participation; coordination of reservations, ticketing, passenger check in and baggage handling; transfer of passenger and baggage at any point of connectivity, among others. The code-share agreements currently in place with other airlines include Air Canada, United Airlines, Aeromexico, All Nippon Airways., Copa Airlines, Singapore Airlines, OceanAir Linhas Aéreas, S.A., Iberia, Lufthansa, Eva Airways, Etihad Airways, Silver Airways and Turkish Airlines. Avianca, Taca International (as well as Taca affiliates) and Aerogal are members of Star Alliance, which give customers access to destinations and services offered by Star Alliance network, allowing customers to access all the destinations and services offered by the 28 member airlines of the Star Alliance network. Its members include several of the most recognized airlines worldwide, such as Lufthansa, United Airlines, Thai Airlines, Air Canada, TAP, Singapore Airlines, among others, as well as smaller regional airlines. All of them are committed to meet the highest standards in terms of security and customer service. Cargo operations are carried out by our subsidiaries and affiliates, including Tampa Cargo S.A.S. The Company also undertakes cargo operations through the use of hold space on passenger flights and dedicated freight aircraft. In certain of the airport hubs, the Company performs ground operations for third-party airlines. The Company operates a coalition loyalty program, including the frequent flyer program for the airline subsidiaries of Avianca Holdings S.A. named LifeMiles. LifeMiles is designed to build customers loyalty and increase loyalty by offering incentives, among others, to passengers traveling on the participating airline partners for their continued preference. Under the LifeMiles program, the customer earns miles by flying through its air partners, including Star Alliance and by using the services of non air program partners such as credit cards, hotels, car rentals and other. 11

15 Aircraft The miles earned can be exchanged for flights or other partners products or services. Customers may redeem their awards through airline members of Star Alliance, which give customers of the Company access to the routes, destinations and services of the Star Alliance network. As of September 30, 2017 and December 31, 2016, Avianca Holdings S.A. had a total fleet consisting of: Owned/ Financial Lease September 30, 2017 December 31, 2016 Owned/ Operating Financial Operating Lease Total Lease Lease Airbus A Airbus A Airbus A Airbus A Airbus A Airbus A-330F Airbus A-300F-B4F Boeing ATR ATR Boeing 767F Cessna Grand Caravan Embraer E Total Cessation of pilot activities affiliated with the Colombian Association of Civil Aviators (ACDAC) Avianca S.A. (subsidiary of the Avianca Holdings Group) in compliance with Colombian labor regulations, held between August 23 and September 11, 2017, the stage of direct arrangement between the Company and the Colombian Association of Civil Aviators (ACDAC), without reaching an agreement between the parties concerning the list of demands presented by ACDAC on August 8th, During the days 18 to September 26, 2017, additional conversations were held with the mediation of the Ministry of Labor. Despite the multiple economic and regulatory proposals presented by the Company s Management to the requests of the pilots, in the different sessions of the direct settlement phase and always with the support of the Ministry of Labor, the pilots affiliated with ACDAC began a cessation of activities on September 20 th, After 51 days of cessation of activities by the pilots affiliated to ACDAC, on November 10th 2017 the general assembly of ACDAC, finally decided to end the strike indicating that they would return to their jobs on November 13th From now on, a reincorporation process to guarantee that the reinstate of all the aviators that were in cessation of activities is under the operational rigorous standards of Avianca and the Collective Labor Convention will be carried out. Likewise, the operational recovery plan will be gradual. Currently, two independent legal instances are currently ongoing in the competent entities: 12

16 Arbitration Court - On September 28 th, 2017, by the administrative order No. 3744, the Ministry of Labor convened a compulsory arbitration tribunal to settle differences in economic claims between the Company and ACDAC, in order to preserve the air transport service, considered as an essential public service, ordered the inmediate return of workers to their activities. However, ACDAC does not acknowledge the court and as a result of this a large part of its members not returned to their Jobs in that moment, as mandated by law. By the time of presentation of this report, the tribunal is constituted by three arbitrators formally possessed, who must issue arbitral award on this matter, that will end the collective conflict. Declaration of illegal cessation of activities On September 25 th 2017, the company presented a lawsuit which principal claim is the declaration of illegality of the cessation of activities where the Superior Court of Bogota handed down a ruling declaring the illegality of the cessation of activities advanced by ACDAC, decision that was appealed by ACDAC; this procedural stage is handled by the Labor Chamber of the Supreme Court of Justice, who must decide the appeal filed by ACDAC and confirm or revoke the decision about the illegality of the cessation of activities proffered by the Superior Court of Bogota. Additionally, ACDAC has presented three (3) protection actions that have been denied, in relation with the announcement made by the Ministry of Labor to form an Arbitration Court and the illegality verdict issued by the Superior Court of Bogota. Avianca S.A. is awaiting the decisions and actions of the Colombian justice system in the different legal instances and will obey the decisions that are made. In the meantime, Avianca S.A has implemented a contingency plan in order to mitigate the operational impact of the illegal cessation of activities by the unionized pilots of ACDAC. Among the main actions adopted are: hiring foreign operators for the routes between Colombia and Europe, the operation of Bogotá-Sao Paulo-Bogotá flights by Avianca Brasil, the increase of flights to the national destinations that were high demand for the last days of October and the incorporation of Airbus A321NEO aircraft to increase the capacity of passengers in certain routes, as well as the operation of other international routes through companies of the Holding. Furthermore, the permanent update on the status of flights through the different information channels, the reinforcement of the airport service team and the increase of the human resources available to respond concerns through the Call Center, were part of the plan. From the moment that the contingency started, the company has offered to the affected passengers the possibility of rearrangement in other flights of the airline, the reimbursement of 100% of the ticket value and the rescheduling of their trip without extra payments. This illegal cessation of activities by the pilots associated with ACDAC that lasted 51 days, has a negative impact of 10 days over the Company s operating results by the date of September 30 th, estimated in $17,100. The foregoing, as a consequence of the reduction in air tickets sales and load transportation, additional costs for compensation to passengers and lower operating costs. The average loss per day from the beginning of the illegal cessation of activities to the date of publication of these financial statements, in the operating results, is estimated between $ 0.8 million and $ 1.3 million. Inasmuch that pilots have been reintegrated and the operation has been optimized, maximizing the number of passengers transported (compared to the first days of illegal cessation, allowing them to approach levels of 80-85% of the operation of Avianca S.A carried by the company in 2017), this value tends to be reduced. The operation of the other airlines of the Holding different to Avianca S.A., keep their normal operation without any impact to their income. 13

17 (2) Basis of preparation Applied Professional Accounting Standards (a) Statement of compliance The Interim Condensed Consolidated Financial Statements for the nine months ended September 30, 2017 have been prepared in accordance with IAS 34 Interim Financial Reporting. The Interim Condensed Consolidated Financial Statements do not include all the information and disclosures required in the annual financial statements, and should be read in conjunction with the Company s annual financial statements as of December 31, The Interim Condensed Consolidated Financial Statements of the Company for the nine months ended September 30, 2017 were prepared and submitted by Management and authorized for issue by the Board of Directors on November 14, (b) Basis of measurement The Consolidated Financial Statements have been prepared on the historical cost basis, except of lands and buildings, derivative financial instruments, available for sale securities and the loyalty program, which are measured at fair value. The carrying amounts of the assets and liabilities recognized and designated as hedged items in hedging relationships of fair value, which would otherwise be carried at amortized cost, were adjusted to record changes in the attributable fair values to risks covered in the respective effective hedging relationships. (c) Functional and presentation currency These Interim Condensed Consolidated Financial Statements are presented in US Dollars, which is the Company s functional currency. All financial information presented has been rounded to the nearest thousands, except when otherwise indicated. (d) Use of estimates and judgments The preparation of the Interim Condensed Consolidated Financial Statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. 14

18 The following are critical judgments used in applying accounting policies that may have the most significant effect on the amounts recognized in the Interim Condensed Consolidated Financial Statements: The Company has entered into operating lease contracts with respect to 53 aircraft. The Company has determined, based on the terms and conditions of the arrangements, that the significant risks and rewards of ownership of all these leased aircraft have not been transferred from the lessor, so it accounts for these lease contracts as operating leases. The Company recognizes revenue from tickets that are expected to expire unused based on historical data and experience. Defining expected breakage requires management to make informed estimates about, among other things, the extent to which historical experience is an indication of the future customer behavior. Annually, or more frequently as the experience data suggests, management reassesses the historical data and makes required adjustments. The Company operates certain aircraft under a financing structure which involves the creation of structured entities that acquire aircraft with bank and third party financing. This relates to 70 aircraft from the A320, A330, ATR and B787 families. The Company has determined, based on the terms and conditions of the arrangements, that the controls these special purpose entities ( SPE ) and therefore, SPEs are consolidated by the Company and these aircraft are shown in the Interim Condensed Consolidated Statement of Financial Position as part of Property and Equipment with the corresponding debt shown as a liability. The following assumptions and estimation uncertainties may have the most significant effect on the amounts recognized in the Interim Condensed Consolidated Financial Statements within the next financial year: The Company believes that the tax positions taken are reasonable. However, tax authorities by audits proceedings may challenge the positions taken resulting in additional liabilities for taxes and interest that may become payable in future years. Tax positions involve careful judgment on the part of management and are reviewed and adjusted to account for changes in circumstances, such as lapse of applicable statutes of limitations, conclusions of tax audits, additional exposures derived from new legal issues or court decisions on a particular tax matter. The Company establishes provisions, based on their estimation on feasibility of a negative decision derived from an audit proceeding by the tax authorities of the respective countries in which it operates. The amount of such provisions is based on various factors, such as experience of previous tax audits and different interpretations of tax regulations by the taxable entity and the responsible tax authority. Actual results could differ from estimates. Deferred tax assets are recognized for all unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilized. Significant management judgment is required to determine the amount of deferred tax assets that can be recognized and the tax rates used, based upon the likely timing and the level of future taxable profits together with future tax planning strategies, and the enacted tax rates in the jurisdictions in which the entity operates. 15

19 The Company measures administrative land and buildings primarily in Bogota, Medellin, San Jose, and San Salvador at revalued amounts with changes in fair value being recognized in other comprehensive income. The Company engaged independent valuation specialists to determine the fair value of these assets as of December 31, 2016 and The valuation techniques used by these specialists require estimates about market conditions at the time of the report. The Company assesses whether there are any indicators of impairment for all non financial assets, flight equipment, goodwill and indefinite lived intangible assets are tested for impairment annually and at other times when such indicators exist. Impairment analysis requires the Company to estimate the value in use of the cash generating units to which goodwill is assigned. The cost of defined benefit pension plans and other post employment medical benefits and the present value of the pension obligation are determined using actuarial valuations. An actuarial valuation involves making various assumptions which may differ from actual developments in the future. These include the determination of the discount rate, future salary increases, mortality rates and future pension increases. Due to the complexity of the valuation, the underlying assumptions and its long term nature, a defined benefit obligation is highly sensitive to changes in these assumptions. All assumptions are reviewed at each reporting date. In determining the appropriate discount rate for pension plans in Colombia, management refers to market yields on Colombian Government bonds, since it is management s judgment that there is no deep local market for high quality corporate bonds. The mortality rate is based on publicly available mortality tables in Colombia. Future salary increases and pension increases are based on expected future inflation rates in Colombia. As a result of the maturity of Loyalty business and given the information available on the history of Program and members behavior, in June 2017 the Company implemented a new methodology to estimate breakage. In the previous methodology, the breakage was calculated based on historical redemption patterns from older months, taking each month as a single segment without regards for member composition in the Program. The new methodology considers the behavior of thousands of segments as a unit of analysis and projection of future behavior, and therefore is considered to be more robust in predicting redemption rates by segment and breakage estimates of the Program. The change in estimate in accordance with accounting standards was treated prospectively from the date of the change in accordance with IAS 8. The accounting effect on net income for 2017 generated by the change in the estimate will be negative at 8.3 million. Aircraft lease contracts establish certain conditions in which aircraft shall be returned to the lessor at the end of the contracts. To comply with return conditions, the Company incurs costs such as the payment to the lessor of a rate in accordance with the use of components through the term of the lease contract, payment of maintenance deposits to the lessor, or overhaul costs 16

20 of components. In certain contracts, if the asset is returned in a better maintenance condition than the condition at which the asset was originally delivered, the Company is entitled to receive compensation from the lessor. The Company accrues a provision to comply with return conditions at the time the asset does not meet the return condition criteria based on the conditions of each lease contract. The recognition of return conditions require management to make estimates of the costs of return conditions and use inputs such as hours or cycles flown of major components, estimated hours or cycles at redelivery of major components, projected overhaul costs and overhaul dates of major components. At redelivery of aircraft, any difference between the provision recorded and actual costs is recognized in the Interim Condensed Consolidated Statement of Comprehensive Income. (3) New Standards, interpretations, and amendments adopted by the Company (3.1) Amendments to IFRSs that are mandatorily effective for the current year The accounting policies adopted in the preparation of the interim condensed consolidated financial statements are consistent with those followed in the preparation of the Group s annual consolidated financial statements for the year ended December 31, 2016, except for the adoption of new standards effective as of January 1, The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective. Although these amendments apply for the first time in 2017, they do not have a material impact on the interim condensed consolidated financial statements of the Group. The nature and the impact of each amendment is described below: Amendments to IAS 7 Statement of Cash Flows: Disclosure Initiative The amendments require entities to provide disclosures about changes in their liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes (such as foreign exchange gains or losses). On initial application of the amendment, entities are not required to provide comparative information for preceding periods. The Group is not required to provide additional disclosures in its condensed interim condensed consolidated financial statements, but will disclose additional information in its annual consolidated financial statements for the year ended December 31, Amendments to IAS 12 Income Taxes: Recognition of Deferred Tax Assets for Unrecognised Losses The amendments clarify that an entity needs to consider whether tax law restricts the sources of taxable profits against which it may make deductions on the reversal of that deductible temporary difference. Furthermore, the amendments provide guidance on how an entity should determine future taxable profits and explain the circumstances in which taxable profit may include the recovery of some assets for more than their carrying amount. 17

21 Entities are required to apply the amendments retrospectively. However, on initial application of the amendments, the change in the opening equity of the earliest comparative period may be recognised in opening retained earnings (or in another component of equity, as appropriate), without allocating the change between opening retained earnings and other components of equity. Entities applying this relief must disclose that fact. The Group applied the amendments retrospectively. However, their application has no effect on the Group s financial position and performance as the Group has no deductible temporary differences or assets that are in the scope of the amendments. (3.2) Standards issued but not yet effective The group has not applied the following new and revised IFRSs that are not yet effective: IFRS 9 Financial Instruments (1) IFRS 15 Revenue from contracts with Customers (1) IFRS 16 Leases (2) Amendments to IFRS 2 Classification and measurement of share based payments (1) (1) Effective for annual periods beginning on or after January 1, 2018, with earlier application permitted. (2) Effective for annual periods beginning on or after January 1, 2019, with earlier application permitted. IFRS 9 Financial Instruments In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments that replaces IAS 39 Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9. IFRS 9 brings together all three aspects of the accounting for the financial instruments project: classification and measurement; impairment; and hedge accounting. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, with early application permitted. Except for hedge accounting, retrospective application is required, but providing comparative information is not compulsory. For hedge accounting, the requirements are generally applied prospectively, with some limited exceptions. The Group plans to adopt the new standard on the required effective date. The Group expects no significant impact on its balance sheet and equity, nevertheless the Company is analyzing the impact of this standard. IFRS 15 Revenue from contracts with customers IFRS 15 Revenue from contracts with customers ; in force for periods beginning on or after January 1, This standard establishes a new five-step model that will be applied to revenue from customer contracts. Revenue is recognized at an amount that reflects the amount that an entity expects to receive as consideration for such goods or services and at the time the execution obligations associated with those goods or services are satisfied. 18

22 AVH has launched a project to identify revenue flows across the Group and to analyze them using the five-step model. At this moment, the Group anticipates that the adoption of IFRS 15 will lead to the following major changes in revenue accounting: Changes in the gross or net presentation of revenue arising from the revision of the terms and conditions of certain transactions carried out by the operating companies, in the case in which they could be identified as the principal or agent. A change in the time at which certain auxiliary revenues are recognized, to coincide with the principal execution obligations associated with the services provided; Reclassification of some auxiliary revenues that are currently being presented as other revenues, to passenger revenues. The Group should adopt this standard as of January 1, 2018 and is currently assessing whether it chooses to apply it fully retroactively or applying the transition method to the cumulative effect of the initial application. The Group is assessing the effects in the financial performance or financial position after the adoption of this standard. IFRS 16 Leases This standard requires that lessees recognize all leases in a similar way to finance leases under IAS 17 Leases. The standard includes two exceptions to this recognition, leases of assets (1) low value (e.g. personal computers) and (2) short-term contracts (less than 12 months). The lessor recognizes from the beginning of the lease, the asset that represents the right to use and the payments liability to be made. Meanwhile, the interest expense is recorded separately to depreciation. Recognition requirements for the lessor have no relevant changes compared to IAS 17. Some key metrics could be affected: EBIT, debt covenants, financial and debt indicators, as well as the presentation of cash flows, which would be presented as financing activities and not as operating activities. Effective date for annual periods beginning on or after January 1, 2019 onwards, early application is permitted, but not before applying IFRS 15 Revenue from contracts with customers. The Company is analyzing the impact of this standard and plans to adopt it on the required effective date. IFRS 2 Classification and Measurement of Share-based Payment Transactions Amendments to IFRS 2 The IASB issued amendments to IFRS 2 Share-based Payment that address three main areas: the effects of vesting conditions on the measurement of a cash-settled share-based payment transaction; the classification of a share-based payment transaction with net settlement features for withholding tax obligations; and accounting where a modification to the terms and conditions of a share-based payment transaction changes its classification from cash settled to equity settled. 19

23 On adoption, entities are required to apply the amendments without restating prior periods, but retrospective application is permitted if elected for all three amendments and other criteria are met. The amendments are effective for annual periods beginning on or after January 1, 2018, with early application permitted. The Group is assessing the potential effect of the amendments on its consolidated financial statements. (4) Segment information The Company reports information by segments as established in IFRS 8 Operating segments. For management purposes, the Company has two reportable segments, as follows: Air transportation: Corresponds to passenger and Cargo operating revenues on scheduled flights and freight transport, respectively, including flights operated by other airlines under code-sharing agreements. Loyalty: Corresponds to the coalition loyalty program, including the frequent flyer program for the airline subsidiaries of Avianca Holdings S.A. Since July 31, 2015, the Board of Directors has monitored the operating results of the Company s business units separately for the purpose of making decisions about resource allocation and performance assessment. The Company s revenues by business segment for the period ended September 30, 2017 are as follows: Air transportation Loyalty (1) Eliminations Consolidated Revenue External customers $ 3,109,918 $210,832 $ $3,320,750 Inter-segment 83,666 2,557 (86,223) Total revenue $ 3,193,584 $213,389 $ (86,223) $3,320,750 Cost of loyalty rewards 36,917 96,206 (80,514) 52,609 Operating expenses 2,800,024 20,538 (8,856) 2,811,706 Depreciation and amortization 219,009 9,647 (9,583) 219,073 Interest expense 129,551 2, ,485 Interest income (3,371) (1,545) (47) (4,963) Derivative instruments 2,211 2,211 Foreign exchange 16,516 (10) 16,506 Income tax expense 23, ,823 Net (loss) profit for the Period $ (30,443) $ 85,013 $ 12,730 $ 67,300 Total Assets $ 6,558,156 $241,589 $ (115,758) $6,683,987 Total Liabilities $ 4,917,442 $535,196 $ (101,156) $5,351,482 20

24 The Company s revenues by business segment for the period ended September 30, 2016 are as follows: Air transportation Loyalty (1) Eliminations Consolidated Revenue External customers $ 2,854,954 $178,362 $ $3,033,316 Inter-segment 67,315 3,972 (71,287) Total revenue 2,922, ,334 (71,287) 3,033,316 Cost of loyalty rewards 39,920 90,860 (60,731) 70,049 Operating expenses 2,584,978 14,387 (10,556) 2,588,809 Depreciation and amortization 193,276 9,586 (9,583) 193,279 Interest expense 131, ,765 Interest income (10,168) (498) (10,666) Derivative instruments (4,785) (4,785) Foreign exchange 39, ,836 Income tax expense 5,688 1,512 7,200 Net (loss) profit for the Period $ (58,181) $ 66,427 $ 9,583 $ 17,829 Total Assets $ 6,230,135 $224,524 $ (186,220) $6,268,439 Total Liabilities $ 4,830,940 $202,188 $ (92,895) $4,940,233 (1) Loyalty revenue for miles redeemed is allocated to passenger revenue and, other loyalty revenue is recorded in other revenue. The results, assets and liabilities allocated to the loyalty segment reportable correspond to those attributable directly to the subsidiary LifeMiles Ltd., and exclude assets, liabilities, income and expenses of the loyalty program recognized by the Company s Subsidiaries. Inter-segment revenues are eliminated upon consolidation and reflected in the Eliminations column. 21

25 The Company s revenues by geographic area for the periods ended September 30, 2017 and 2016 are as follows: For the nine months ended September 30, North America $ 416,761 $ 397,660 Central America and the Caribbean 376, ,298 Colombia 1,474,355 1,321,824 South America (not including Colombia) 723, ,787 Other 329, ,747 Total operating revenue $ 3,320,750 $ 3,033,316 The Company allocates revenues by geographic area based on the point of origin of the flight. Non-current assets are composed primarily of aircraft and aeronautical equipment, which are used throughout different countries and are therefore not assignable to any particular geographic area. (5) Seasonality The results of operations for any interim period are not necessarily indicative of those for the entire year because the business is subject to seasonal fluctuations. These fluctuations are the result of high vacation and leisure demand occurring during the northern hemisphere s summer season in the third quarter (principally in July and August) and again during the fourth quarter (principally in December). In addition, January is typically a month in which heavy air passenger demand occurs. The lowest levels of passenger traffic are concentrated in February, April and May. Given the proportion of fixed costs, the Company and its subsidiaries expect that quarterly operating results to continue to fluctuate from quarter to quarter. This information is provided to allow for a better understanding of the results, however management has concluded that this does not constitute highly seasonal as considered by IAS 34. (6) Foreign exchange The Company has liabilities denominated in Colombian pesos, such as its pension plans and bond issues. For the nine-months period ended September 30, 2017, the Company recognized a net loss of $16,506, mainly as a result of the depreciation of the Colombian peso against the US dollar of 2.1%, compared to the exchange rate as of December 31, The Company has liabilities denominated in Colombian pesos, such as its pension plans and bond issues. For the nine-months period ended September 30, 2016, the Company recognized a net loss of $39,836, mainly as a result of the depreciation of the Colombian peso against the US dollar of 8.6%, compared to the exchange rate as of December 31,

26 (7) Employee benefits The Company sponsors defined benefit pension plans, which require contributions to be made to separately administered funds. The Company has also agreed to provide certain additional post-employment benefits. These benefits are unfunded. The cost of providing benefits under the defined benefit plans is determined separately for each plan using the projected unit credit cost method. Actuarial gains and losses for defined benefit plans are recognized in full in the period in which they occur in other comprehensive income. The defined benefit liability comprises the present value of the defined benefit obligation (using a discount rate based on government bonds of the country where each benefit plan is established), less the fair value of plan assets out of which the obligations are to be settled. Plan assets are assets that are held by the Social Security Institute and private pension funds. Plan assets are not available to the creditors of the Company, nor can they be paid directly to the Company. Fair value is based on market price information and in the case of quoted securities on the published bid price. The value of any defined benefit asset recognized is restricted to the sum of any past service costs and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan. The discount rate indexed by Colombian Government bonds was 6.92 % and 7.50% as of September 30, 2017 and December 31, 2016, respectively. (8) Cash and cash equivalents and restricted cash Cash and cash equivalents and restricted cash as of September 30, 2017 and 2016 and December 31, 2016 are as follows: September 30, 2017 December 31, 2016 September 30, 2016 Cash on hand and bank deposits $ 500,488 $ 365,610 $ 386,407 Demand and term deposits 14,913 10,143 24,744 Cash and cash equivalents 515, , ,151 Restricted cash 7,272 5,371 11,157 Cash and cash equivalents and restricted cash $ 522,673 $ 381,124 $ 422,308 As of September 30, 2017 and December 2016 cash equivalents amounted to $14,913 and $10,143, respectively; of which as of September 30, $5,543 correspond to collective investment funds. As of September 30, 2017 term deposits bear annual interest rates ranging between 4.2% and 9.01% for balances in Colombian Pesos and as of December 31, 2016 between 6.66% and 11.97% for balances in Colombian Pesos. 23

27 (9) Accounts receivables, net of provision for doubtful accounts Receivables as of September 30, 2017 and December 31, 2016 are as follows: September 30, 2017 December 31, 2016 Trade $ 249,946 $ 206,229 Indirect tax credits (1) 219, ,114 Manufacturer credits 9,933 13,216 Employee advances (2) 6,389 5,138 Other 29,813 10,475 $ 516,079 $ 419,172 Less provision for doubtful accounts (13,845) (13,256) Total $ 502,234 $ 405,916 Net current $ 359,752 $ 313,868 Net non-current 142,482 92,048 Total $ 502,234 $ 405,916 (1) Corresponds mainly, to tax credit of income tax, VAT, withholding tax credits and advances of ICA, advances and prepayments income of CREE and advance payments for departure rates. (2) Employee advances mainly relate to per diem allowances provided to crew prior to traveling. Changes during the year in the allowance for doubtful accounts are as follows: September 30, 2017 December 31, 2016 Balance at beginning of the period $ 13,256 $ 13,314 Bad debt expense 3,691 2,966 Write-offs against the allowance (3,102) (3,024) Balance at end of the period $ 13,845 $ 13,256 24

28 (10) Balances and transactions with related parties and key management compensation expenses The following is a summary of related party transactions for the periods ended September 30, 2017, 2016 and December 31, 2016: Company Country September 30, 2017 December 31, 2016 September 30, 2016 Receivables Payables Revenues Expenses Receivables Payables Revenues Expenses SP SYN Participações S.A. Brazil $ 13,630 $ $ 637 $ $ 12,993 $ $ 590 $ OceanAir Linhas Aéreas, S.A. Brazil 3, ,732 18,484 3,395 2,623 17,836 13,174 Synergy Group Corp Brazil 1,191 1,165 Aerovias Beta Corp. Panama Synergy Aerospace Corp. Panama 512 1,262 4, , Aeromantenimiento, S.A. El Salvador , ,064 Empresariales S.A.S. Colombia , , ,457 Transportadora del Meta S.A.S. Colombia , , ,413 Corp. Hotelera Internacional., S.A. El Salvador Other , ,018 Total $ 19,843 $ 3,406 $19,410 $38,530 $ 19,283 $ 9,072 $19,348 $33,589 25

29 The receivables balance with SP SYN Participações S.A. as of September 30, 2017 amounted to $13,630, consisting of $12,856 of principal and $774 of accrued interest. The debt bears an interest equal to 90 days LIBOR plus 550 basis points. The deadline for payment of the obligation, principal and accrued interest is on October 31, The Company has not recognized any expense or provision for doubtful accounts since it is expected that the balances will be recovered completely. All related parties are companies controlled by the same ultimate shareholder that controls Avianca Holdings S.A. The following is a description of the nature of services provided by and to related parties. These transactions include: Related party SP SYN Participações S.A. OceanAir Linhas Aéreas, S.A. Synergy Group Corp Aerovias Beta Corp. Nature of Services Avianca, S.A. ( Avianca ) and SP SYN Participações S.A. ( SP SYN ) signed a novation of the receivables from OceanAir Linhas Aéreas, S.A. ( OceanAir ) whereby SP SYN would be the new debtor. The Company provides to and receives from OceanAir logistic services, marketing and advertising, maintenance services, and training services. The Company has entered into a licensing agreement with OceanAir for the use of the Avianca trademark in Brazil. Additionally, the Company leases aircraft to OceanAir (see Note 23). On November 4, 2014, Tampa Cargo S.A.S., entered into a Block Space Agreement with OceanAir Linhas Aéreas, S.A., acquiring priority rights and a minimum guaranteed cargo capacity on certain flights of the carrier. Avianca,S.A and Synergy Group Corp made a negotiation to acquire a group of properties known as Lote de Escritorio.Avianca made the payment to Synergy Group Corp of 100% of this purchase, so it acquired directly these properties, but at the moment of its writing, one of these properties had a problem of registration, so it is maintained in an account receivable from Synergy Group Corp and has not been recognized as a fixed asset, until the writing process is completed. The accounts receivables balance relates to amount owed to Latin Airways Corp. arising from the Aerovias Beta Corp. spinoff, which gave rise to Latin Airways Corp. 26