2016 MANAGEMENT REPORT Bogotá D.C. March 2017 Informe de gestión 2016 • Avianca Holdings S.A. 1 Letter from the Executive President G4-1 ur goal is to provide details of the progress we made in We opened the Maintenance, Repair and Inspection 2016 on the path to change and transformation that Aeronautics Center (MRO) in Rionegro, in Colombia’s Avianca has embarked on. Antioquia province, with an initial investment in 2016 of We established a single reporting period so that we USD 42,081 million, where more than 600 technicians could present the results of our efforts in accordance and engineers currently work, all of them experts in the with the regulations and expectations of each of the Airbus A318, A319, A320, A321 and ATR72 fleets and who Organization’s stakeholders. are currently in the process of being accredited to provide We want to share the change perspective in our engineering and maintenance services for aircraft in the business approach, the Organization’s long-term vision, its Boeing 787 and Airbus 330 fleets. The MRO meets LEED challenges, and the way in which we create value for each sustainable construction standards and has been endorsed one and for the environment. by Colombia’s Civil Aeronautics Authority, the US Federal In 2016, we set out on the path we have called our 2020 Aviation Administration (FAA), and the European Aviation Flight, connecting the world to Latin America. We chose Safety Agency (EASA). our destination as making Avianca a digital company that In a difficult year for the global economy and for our flies aircraft. The oldest continuously operating airline sector, we succeeded in adhering to the performance range in the world and the first in America, with a significant we promised the market. And we made two momentous improvement in our customers’ experience through our achievements. On the one hand, we formed the managerial use of the best technology and the best human talent, so team responsible for operating the extremely rigorous we always give more. customer care processes and for the development of 2 2016 Management Report• Avianca Holdings S.A. world-class human talent, establishing a new corporate culture that reflects our humanly effective leadership model and takes technology on board in order to deliver to the customer an exceptional travel experience. On the other hand, we also established our flight plan for 2020, setting out the Avianca vision and mission, which are centered around the customer as both the beginning and end of our service strategy. In 2016 we reinforced our governance and our conduct towards our stakeholders. We are implementing a new risk management model based on three lines of defense, namely responsibility, clear processes and the intensive use of technology, which together enable us to be sure that we are doing what is correct and doing it well. The organization has appreciated that the key to sustainable management that generates value for all our stakeholders lies in relating with them strategically, with a view to achieving our goals. Avianca thus becomes a transformation agent for the societies where it operates by contributing economic, social and environmental value, thereby illustrating its excellent corporate citizen status. Sustainability is present in every one of the decisions we make as professionals and individuals, so that it becomes a hallmark of our organization. To achieve this, the most important thing is for each of us to be conscious of this need and to consider the consequences of what his or her own conduct is having and will have on the Organization, on society, and on his or her family. 2015 and 2016 have been years that have brought major global challenges in the field of sustainability, especially in the context of the Paris Summit climate change agreement and the Sustainable Development Objectives (SDO). We at Avianca are convinced that the best way to achieve our goals is to do so in a sustainable manner, generating value not only for the Company but Hernán Rincón for all society. This is why we have an approach to work that has to adapt to present and future challenges and trends and should contribute to global agendas. The causes of climate change have their direct origin in human and organizational activities, and we should therefore responsibly administer our impacts. We recognize that the Sustainable Development Objectives (SDO) form a global agenda down to 2030, and here the way in which the material matters presented in this report are managed undoubtedly contributes greatly, and will continue to do so. We will be ready to work as a team with the governments of the countries where we operate, with civil society and with the private sector, in order to ensure that these objectives are met and that we leave the new generations the legacy we hope for. 2016 Management Report• Avianca Holdings S.A. 3 Contents 8 ABOUT THIS REPORT 24 PERFORMANCE BY SEGMENT 24 Passenger Transportation 25 Cargo Transportation 10 WORLD AIR TRANSPORTATION 25 Deprisa MARKET ENVIRONMENT 28 Other lines of business 10 International Passenger Market 29 Where we operate 11 Domestic Passenger Market 30 The past, driving force for the future 11 Air Cargo Transportation Market 32 Our Integrated Management System 34 Awards and Certifications 12 ABOUT AVIANCA HOLDINGS S.A. 12 Corporate Profile, Avianca Holdings S.A. 36 OUR CORPORATE STRATEGY 12 Nature of the Company and legal status 36 To fly higher 13 Companies which make up Avianca Holdings S.A. 37 Our Strategic North to 2020 14 Significant changes in 2016 38 Our responsible and sustainable management 14 2016 Avianca Holdings S.A. performance strategy 14 Financial and Operations Results 40 In line with international standards and initiatives 15 Passenger Airline operation indicators 40 Alliances for Sustainability 15 Integrated airlines improve their market position 40 Strategic Relations 16 International Market 16 Domestic markets (Colombia, Peru and Ecuador) 46 CORPORATE GOVERNANCE 46 Avianca Holdings S.A. Board of Directors 16OUR PASSENGER AND CARGO 46 About Board of Directors members TRANSPORTATION FLEET 49 Executive Committee 49 Top Management Diversity 50 Legal Situation 17 FLEET RENEWAL 50 Subsequent facts 51 Annual Avianca Holdings S.A. Corporate Governance Report 18 DESTINATIONS, ROUTE NETWORK AND ALLIANCES 18 New Services on International Routes 74 RELATIONS WITH STAKEHOLDERS 18 Increased International and Domestic Frequencies 76 SOCIAL, ENVIRONMENTAL AND ECONOMIC 18 Hubs MATERIALITY 18 Shared codes, interline and intermodal agreements 19 Star Alliance 80 SOCIALLY RESPONSIBLE MANAGEMENT 4 2016 Management Report• Avianca Holdings S.A. 80 I. PASSENGER AND CARGO (SAFETY) 98 IV. RESPONSIBLE HUMAN TALENT MANAGEMENT 80 The importance to Avianca Holdings and its 98 The importance to Avianca Holdings and its stakeholders stakeholders 82 Notable facts, 2016 98 Notable facts, 2016 82 Risk management and reporting culture 98 Employment 82 Flight Operations Monitoring - FOM/FDA 102 Innovation in our human talent model 83 Other projects 103 Technology for better talent 83 Measuring performance and operating risk manage- 103 Formalization agreements ment monitoring 103 Training and education 83 Promotion of operational safety 104 Performance evaluation 84 Line Operations Safety Audit - LOSA 105 Welfare and job flexibility 84 Certifications 105 Challenges in 2017 and the future 84 Challenges in 2017 and the future 85 GROUND AND AIR PROTECTION (SECURITY) 106 V. SAFE AND HEALTHY WORKING 85 The importance to Avianca Holdings and its ENVIRONMENT stakeholders 106 The importance to Avianca Holdings and its stakehol- 85 Notable facts, 2016 ders 85 Challenges in 2017 and the future 107 Notable facts, 2016 107 Accident rate, absenteeism and health performance in 2016 86 CUSTOMER EXPERIENCE 117 Challenges in 2017 and the future (TRAVEL EXPERIENCE) 86 The importance to Avianca Holdings and its stakeholders 118 VI. CONTRIBUTION TO SOCIETY 86 Notable facts, 2016 118 The importance to Avianca Holdings and its stakehol- 87 The customer at the center of our strategy ders 88 Customer plan 118 Notable facts, 2016 88 Digital Foundations 118 Avianca Holdings social programs 89 Customer first 118 Miles Bank 90 Our products and services 118 Corporate volunteer program 92 ‘Carla’: our virtual assistant 120 Strategic alliances 93 Customer satisfaction: our continuous 122 Children for Americ improvement indicator 123 Avianca Solidarity 93 NPS for Frequent Flier Program 124 Other humanitarian aid through Avianca Solidarity 94 Complaints and claims 125 Challenges in 2017 and the future 96 On Time Performance (OTP) and Schedule 126 Development that respects the environment Completion 96 Challenges in 2017 and the future 2016 Management Report• Avianca Holdings S.A. 5 126 VII. DEVELOPMENT THAT RESPECTS THE 140 Waste water ENVIRONMENT 126 The importance to Avianca Holdings and its stake- 140 XI. RESPONSIBLE WATER MANAGEMENT holders 140 The importance to Avianca Holdings and its stake- 127 Environmental management standardization holders 129 Environmental Policy 140 Notable facts, 2016 130 Notable facts, 2016 141 Challenges in 2017 and the future 130 Training and environmental awareness 142 Generating Economic Value 130 Expenses and investment in the environment 142 XII. RESPONSIBLE SUPPLY 131 IMPACT MITIGATION AND ADAPTATION TO 142 The importance to Avianca Holdings and its stake- CLIMATE CHANGE holders 131 The importance to Avianca Holdings and its stake- 142 Notable facts, 2016 holders 143 New supply model 131Notable facts, 2016 144 Supplier development and evaluation 131 Aircraft fleet emissions 145 Local supplies 132 Carbon Reduction and Compensation Plan for 145 Human Rights follow-up on our suppliers International Aviation- CORSIA 146 Challenges in 2017 and the future 133 CO2 emissions by aircraft on ground, Bogotá station 134 Fuel saving strategies 146 XIII. GENERATING ECONOMIC VALUE 135 Fuel consumption 148 Prospects for 2017 and the future 136 Fuel value of A1 jet fuel consumed by AVH 149 Audited Financial Statements 150 Certification 151 CRI-G4 content index, core option 137 IX.