Controladora Vuela Compañía de Aviación, S.A.B. de C.V.
Q4 2021 Earnings Call Transcript

Published: 25 Feb 2022

[Operator:]

Good morning, everyone. Thank you for standing by. Welcome to Volaris's Fourth Quarter and Full-Year 2021 Financial Results Conference Call. All lines are in a listen-only mode. Following the company's presentation, we will open the call for your questions and answers. Please note that we are recording this event. This event is also being broadcast live via webcast and may be accessed through the Volaris website. Those following the presentation via the webcast may post their questions on the platform, and they will be either answered by the management during this call or by the Volaris Investor Relations team after the conference is finished. . At this point, I would like to turn the call over to Renato Salomone, Volaris's Senior Corporate Finance and Investor Relations Director. Please go ahead, Renato.

[Renato Salomone:]

Good morning, everyone, and thank you for joining the call. With us today is our President and CEO, Enrique Beltranena; our Airline Executive Vice President, Holger Blankenstein; and our Chief Financial Officer, Jaime Pous. They will be discussing the company's fourth quarter and full-year 2021 results. Afterwards, we will move on to your questions. Please note that this call is for investors and analysts only. Before we begin, please let me remind everyone that this call may include forward-looking statements within the meaning of applicable securities laws. Forward-looking statements are subject to several factors that could cause the company's actual results to differ materially from expectations, for reasons described in the company's filings with the U.S. Securities and Exchange Commission and the Comisión Nacional Bancaria y de Valores. Furthermore, Volaris undertakes no obligation to update or revise any forward-looking statements publicly. Like the earnings press release, we compare results of the fourth quarter and full-year 2019 instead of the fourth quarter and full-year of 2020. We believe this will provide a better comparison to the financial and operating performance of the company. It is now my pleasure to turn the call over to Volaris' President and CEO, Enrique Beltranena.

[Enrique Beltranena:]

Thank you very much, Renato and thank you everyone for joining us today. This past year was marked by significant challenges, constantly changing demand, and the fourth quarter was no different. I could not be prouder of the performance of our company. And I would like to thank Volaris's ambassadors for their efforts, which have been essential in helping us achieve one of the highest margins in the global airline industry. Looking back to the start of the year, this achievement was not as easy as it appears. We started the year with enormous challenges and lackluster demand. Our response was an initial fleet plan of zero growth as we waited for the year to unfold. Once it became apparent that demand growth was accelerating, we swiftly pivoted. We ended the year with 101 aircraft, a net increase of 15 shells. Consequently, we accelerated the new conversion, which continues to help our fuel efficiency and cost side. Not only did we backfill capacity in routes that competitors abandoned, but we added the personnel needed to operate our growing airline. Our growth in 2021 solidified our strong market position and contributed to the favorable results we are presenting today. It is unfortunate for us to present the strong results for the quarter, and for a COVID year in the shadow of the current geopolitical crisis and macroeconomic situation. The company performed well in the fourth quarter, and better in the full-year. We generated a total revenue of Ps.14 billion in the quarter, an increase of 73% versus 2020 and 43% versus 2019. Speaking about our EBITDAR and EBIT margins for the quarter were 37% and 21% respectively. For the full-year of 2021, we grew our revenues by 29% to a total of Ps.45 billion and delivered an EBITDAR margin of 36.7%. Our disciplined ultra low cost strategy, where we remain focused on containing controllable costs, has allowed us to position ourselves as a global airline margin leader and one of the fastest growing airlines in North America. In addition to solid growth, we generated positive cash flow of $235 million during a pandemic year, equivalent to 11% of our market capitalization at the end of 2021. Moreover, we have one of the most robust balance sheets compared to any other Latin American carrier, and our global ultra-low cost carrier peers. At the end of the fourth quarter, our adjusted net debt to EBITDA ratio was 2.5x, the lowest level in the company's history. I want to highlight what I believe to be the key reasons behind our strong financial performance. First, Volaris has demonstrated our ability to adapt to changing demand quickly. Second, Volaris has plenty of market opportunities, both at home and abroad. Third, our growth plans remain flexible. Fourth, our ultra-low cash and debt structure position Volaris well for the softness. Speaking about our demonstrated ability to adapt to changing demand quickly, over these last two years, we have seen rapid market changes resulting from the surges of COVID-19 variants, our seasoned executive team has been through many demand cycles, and is able to respond by quickly recognizing these fluctuations and pivoting when needed, resulting in our ability to report strong TRASM and CASM ex-fuel that have delivered EBITDAR levels well above our domestic and international peers. Looking into 2022, we remain focused on performing well for our customers and better for our shareholders. With respect to our plentiful market opportunities, both at home and abroad, in our home market of Mexico, we continue to observe that demand for air travel is more in line with an emerging market country. Driven by the fast pace of growth of Mexico's emerging middleclass. Thus demand for air travel and switch from long haul bus travel to air continues robustly. The industry was also filling the void of more than 60 aircraft than our competitors removed from the market. Internationally, our near-term opportunities are centered on Central and South America, growing from our separate domiciles in El Salvador and Costa Rica. In the second half of the year, we expect that each one of growth opportunities for Mexico enhanced by fully optimizing our Codeshare partnership with Frontier Airlines. Our growth plans remain flexible. We will only grow in the market if it makes sense for us to do so. Our management team remains disciplined and flexible. We're not tied to a specific market if it's not performing well relative to our expectations. If new or additional capacities not ramping up as expected, we will relocate that capacity. Our ultra-low CASM and debt structure position Volaris well for success. Our focus on the low cost has rewarded us with being in the outstanding position of having one of the lowest cost structures not only domestically, but in the world. We also did not need to leverage our balance sheet like our domestic and international competitors have. On the flip side, we benefited from favorable aircraft pricing as part of our participation in the large multi airline Indigo Partners order. This aircraft allow us to maintain our fuel efficiency advantage and cement our growth through the end of the decade. The result is that not only can we remain profitable when other airlines cannot, but our relative cost gap advantage is likely to widen further in this rising interest rate and fuel environment. As shown on Slide 4, we believe that Volaris's consistent performance demonstrates our resilience and it is essential to highlight that we're in a stronger financial position now than before the pandemic began. Although the airlines are now focusing on recovery and repaying the debt, Volaris is looking for additional avenues of growth, as continued opportunities for our business model remain plentiful. Finally, I want to remind you that Volaris is the most significant player in the emerging Mexican market with a privileged position to continue growing. I would now like to turn the call over to our Airline Executive Vice President, Holger Blankenstein, to discuss our operations and provide more details on our performance.

[Holger Blankenstein:]

Thank you, Enrique. Moving to Slides 5 and 6, we think that our consistency in reporting solid results is the best way to demonstrate our ability to adapt quickly to changing demand. On the revenue side, we experienced a strengthening demand curve throughout the fourth quarter. This demand more than offset our ASM growth of 27% for the quarter, resulting in a healthy and relatively flat load factor compared to 2019 of 86.9%. Against the backdrop of strong demand and rising fuel costs, we raised revenues per passenger early in the first half of the quarter, more than we previously anticipated. This early increase in revenues per passenger was the reason behind our stronger than expected TRASM and overall revenue outperformance relative to our EBITDAR guidance for this quarter. Our domestic network representing 70% of ASMs grew by 30% in the fourth quarter. Most of this growth was out of Mexico City on existing routes, VFR and leisure markets remain strong. International capacity, which represents 30% of our network, grew by 21%. Most of this growth was in the Mexico U.S. market where we also saw healthy demand. Key to our commercial strategy was to take advantage of our unique position in the recovery and push for growth coming out of this pandemic taking advantage of the bus switching momentum and capacity leftover by weaker competitors. Even though ASM growth was strong at 27%, we were able to stimulate demand and achieve a strong load factor of 86.9%. Overall, TRASM in the fourth quarter increased by 13% versus 2019, while the load factor remained strong at 86.9%, with both leisure and VFR markets showing a continued strengthening in the quarter. Compared to other airlines, Volaris does not rely much on business traffic. Ancillary revenues for the fourth quarter continued to show strength increasing by 45% versus 2019 to Ps.810 per passenger. Ancillary revenue reached 42% 43% in 2019. Customers continue to respond well to our traditional products, such as baggage, seat selection, and bundles like the flexibility combo. For 2022, our international growth will help continue to drive ancillary revenues. We are focused on growing these revenues through a more personalized experience on our website to compensate for the regulatory changes. We can further drive growth in members, added to our discount programs and the cobranded credit card. At the end of the fourth quarter, we had a fleet of 101 aircraft with an average age of 5.4 years compared to 82 aircraft at the end of 2019. Additionally, the airline maintained high aircraft utilization with 13.3 hours per day for our productive fleet. Volaris has one of the highest utilizations globally when measured against other airlines with similar aircraft types. And again, even though ASM growth was strong at 27%, we were able to stimulate demand, and we achieved a strong load factor of 86.9%. During the fourth quarter, Volaris flew more than 500 departures per day, an increase of 33% compared to the same period of 2019 serving over 70 different destinations in Mexico, United States, Costa Rica, Guatemala, El Salvador, Honduras, and Colombia. Looking ahead to the first quarter, despite the fourth wave of COVID in our markets, we reported a healthy January traffic performance. We did observe a dip in forward bookings offset by healthy last minute demand. In February, we have observed a consistent decline in COVID cases with a corresponding rise in bookings. As such, we can conclude that Omicron had a three-week impact on sales with a minor effect on the quarter, especially since this is a seasonally low time of travel for us. Every new COVID wave has had less and less impact on our revenues. As far as the competitive environment, this remains similar to what we have already been experiencing in our markets. Overall, fare levels have remained steady. As a reminder, as of year-end 2021, 43% of our routes had no air competition. Turning to Slides 7 and 8, we highlight that we have plenty of market opportunities both at home and abroad. In the domestic market, we benefit from having been in these markets for quite some time, and we know them well. Our low debt and ultra-low cost structure position us well to continue stimulating demand in this market. We also continue to make inroads by educating bus travelers that our advanced purchase fare is competitive to the bus fare price for the same trip. COVID has helped elevate awareness of the cleanliness of flying in a plane versus riding a bus. We believe that many of our new customers' behavior is likely to stay as they are more aware of the relative safety and efficiency of flying Volaris versus a less comfortable experience sitting for long hours on a bus with no air filters. Our surveys have suggested that roughly 60% of our customers who go by air do not come back to travel on the bus. Looking ahead, as mentioned previously, bookings are getting back to normal post the fourth wave of COVID earlier in the current quarter. While the domestic market remains competitive, it has not been anything we have not already been experiencing. Our presence in the market as well as our low-cost structure positions us well for success. One headwind is the shift of Easter to mid-April, which remove some of the first quarter revenue into the second quarter. On the international side, 90% of our capacity is from Mexico to the U.S. While our capacity growth remains constrained due to Mexico's CAT 2, we benefit from high relative market shares in traditional VFR rules. Visiting friends and relatives account for most of our Mexico to U.S. passengers. Our northbound leisure traffic also remains healthy. Looking ahead, we expect Mexico to get back to CAT 1 status with the U.S. in the second half of the year 2022. At that time, we will resume growth in this market. We will also be able to further benefit from our partnership with Frontier Airlines. Central America is still relatively small representing 3% of our capacity. We currently have four aircraft in the region. In the quarter, we saw 19% growth evenly split between VFR and leisure traffic. Overall, Central America continues to lag the recovery in the domestic Mexican market by three to six months. We are establishing our presence in this region as overtime; we see a significant market opportunity. There's currently no other Central American based low-cost carrier in this region an area that is in emerging market with approximately 50 million people. We think we have a substantial opportunity to grow to more than 20 aircraft over the next five years. Volaris Costa Rica is the more established Central American airline that we operate with a separate certificate. Regarding Volaris El Salvador in the second half of 2021, we've received the approval to fly on Volaris El Salvadorian airline certificate. Currently, we have one out of four Central American aircraft dedicated to this market. We characterize this market as in its infancy, with a lot of promise as it grows up to scale. Particularly as we expect to start flying directly with the Salvadorian operating certificates to the U.S. in the second quarter. The Department of Transportation in the United States has already approved the route authority for Volaris El Salvador. In 2021, we did not furlough any team member and hired and trained more than 600 new pilots, almost a 1,000 new cabin crew, and about 600 new airport personnel. We have a healthy pipeline of operation staff recruiting, and we currently do not foresee a shortage of qualified candidates for the year. In addition, we have been continuously active in our vaccination campaign with our staff with over 99% of ambassadors vaccinated. Therefore, unlike other airlines in the region, we did not have to cancel itineraries due to the lack of pilots and cabin crew during the Omicron wave. Our capacity guidance for 2022 has not changed, as we see plenty of runway for growth. For the first half of the year, the development will concentrate on the domestic market. For the second half of the year, we expect more growth in U.S. with CAT 1 recovered and Central America as that region also recovers. Our plan has flexibility built-in and we will adjust depending on market conditions. Our three main avenues of network growth remain the domestic Mexican market and the transborder markets into the U.S. and Central America. Volaris three airline operating certificates provide us with many strategic options. We're currently budgeting ASM growth in the mid 20% range versus the full-year of 2021. And this percentage growth will be frontloaded in the first half given the week comps on the first quarter of 2021. Considering January's reported figures, and the capacity currently on sale for February and March, consolidated ASMs for the first quarter of 2022 are expected to remain flat as compared to the fourth quarter of 2021 implying around 50% ASM growth versus the first quarter of 2021. We believe that this additional capacity will be operated with our traditionally high load factors. Over the next five years, the main pillars of Volaris investment thesis stand. We will continue to benefit from organic GDP growth, population growth, a large and growing middle class in Mexico and the continued switch from long haul bus to air travel, an exciting story that we continue to capitalize upon. Now, I will turn the call over to our Chief Financial Officer, Jaime Pous, to discuss the financial performance for the quarter.

[Jaime Pous:]

Thanks, Holger. Now I'd like to discuss our fourth quarter and full-year 2021 financial results highlighting our strong financial performance. Total operating revenues for the fourth quarter were Ps.14 million a 43% increase compared to the fourth quarter of 2019 driven by the ability of the company to increase its capacity, while improving unit revenue. For full-year 2021 Volaris reported total operating revenues of Ps.45 billion an increase of 29% compared to 2019 levels, driven by the stronger ancillary revenues that resulted in a higher unit revenue. In 2021, ancillary revenue represented 43% of total operating revenues compared to 34% in 2019. CASM ex-fuel for the fourth quarter increased 3% compared to the same period of 2019 closing at $4.08. The company maintained its discipline to low cost structure, despite the inflationary pressures in Mexico and the U.S. For the full-year 2021, Volaris posted a CASM ex-fuel of $4.25, an increase of 7% due to lower utilization earlier in the year higher maintenance cost and delivery expenses. We continue to focus on containing our controllable costs. Total CASM for the quarter closed at $6.60, a 3% increase compared to the fourth quarter of 2019 mainly due to higher fuel prices. The average economic fuel costs per gallon increased 16% in the fourth quarter. Overall, for full-year 2021 Volaris registered a total CASM of $6.45 the same level reported in 2019, despite the macroeconomic headwinds. Confirming the financial benefit of the renewal of our fleet, the company continues its disciplined commitment to maintain in one of the lowest unit costs in the global aviation industry. For 2022, the company expects to continue seeing volatility in fuel prices, considering the international macroeconomic environment as well as additional inflationary pressure. Nonetheless, Volaris' management will closely follow macroeconomic trends to react swiftly and we will continue to pursue further cost efficiencies to maintain a healthy cost structure. Volaris will continue to benefit from a high percentage of neo aircraft and its fleet, which is our best natural hedge against higher fuel prices and one of our main competitive advantages. The company expects fuel savings between 24 million and 28 million gallons in 2022 or over $70 million, assuming current market prices compared to 2019 through investment in neos operating and other initiatives. Increasing fuel efficiency is part of Volaris' ESG goals. And it's also helpful to the P&L, especially in a high fuel price environment like we are currently facing. While higher fuel prices in profitable airlines Volaris' combination of greater seat density aircraft, and our more fuel efficient fleet means that our per passenger fare will need to move up less than other competitors to offset the rising cost of fuel. As a result of changes in the way we measure our business performance the calculation of our selling fares based on our U.S. dollar denominator expenses and the increase in our international or market operations, which change our functional currency from the Mexican peso to the U.S. dollar as of December 31, 2021. We believe the U.S. dollar most accurately reflects the current environment we operate in, and the adopting this new functional and currency will both mitigate the impact of Mexican peso volatility over our financial results, and simplify the reading of our financial statements by the public in general, which will improve the comparability of Volaris with other companies in the market and allow better forecasting by the Street. As a result of this change, we also concluded that the hedging strategies related to non-derivative financial instruments would no longer be effective and should be terminated. The non-cash accounting charge related to this termination generated a one-time foreign exchange loss of $109 million, or the equivalent to Ps.2.25 billion recorded as part of the comprehensive financial results, leading to a net loss of Ps.200 million. Without the one-time charge, Volaris would have posted a net profit of Ps.1.6 billion for the quarter. Effective January 1, the company will provide figures in U.S. dollars, with this corresponding comparison to previous periods. For the full-year 2021 Volaris reported a net income of Ps.2.1 billion, adjusted net income excluding one-time non-cash accounting charge, related to the change in functional currency was Ps.3.9 billion a 47% increase over prior year. The company reported adjusted earnings per share of Ps.3.33 and adjusted earnings per ADS of $1.62. For the fourth quarter, EBITDAR was Ps.5.2 billion with a EBITDAR margin of 37%. Overall, in 2021, Volaris reported EBITDAR of Ps.16.4 billion an increase of 53% compared to 2019. As I mentioned earlier, this result was driven by higher capacity, healthy load factors, and substantial unit revenue while maintaining our cost discipline. EBITDAR margin for 2021 was 36.7%, an increase of 5.9 percentage points compared to the 2019 figure. Furthermore, Volaris delivered cash generation of Ps.2.6 billion for the fourth quarter and Ps.5.2 billion for 2021 closing the year, with Ps.15.3 million or $741 million in cash and cash equivalents, representing 34% of last 12 months operating revenue. Cash and cash equivalents include the issuance of our first sustainability-linked asset backed trust notes. Net cash flow generated by operating activities in the fourth quarter was Ps.5.1 billion due to increased total operating revenues and improved pricing during the fourth quarter. Cash flow used in investing and financing activities was Ps.1.4 billion and Ps.1.8 billion respectively. The company's best use of its cash generation is to avoid road fleets and network for the future. Volaris has one of the most robust balance sheets among the Latin American carriers and our global peers. At the end of the fourth quarter are adjusted net-debt-to-EBITDAR ratio was 2.5x compared to 3.5x in the same period of 2019 and 2.8x in the third quarter of 2021 on a record level in the company's history. In comparison, our main domestic and U.S. competitors have an average net-debt-to-EBITDA ratio of over 7x, which places us in an advantageous position in a rising interest rate environment. During the fourth quarter, the company incorporated seven new A320neo aircraft into its fleet. As of December 31, 2021 Volaris' fleet was composed of 101 aircraft with an average of 5.4 years. Volaris' fleet had an average of 187 seat per aircraft, 82% of its aircraft are sharklet-equipped and 45% are New Engine Options or NEO models. We expect to end 2022 with approximately a 115 aircraft depending on Airbus's delivery scale compliance, increasing to 54% of our neo fleet. On November 15, Volaris signed a new purchase order with Airbus for 39 A321neo and 25 A321neo options, securing its wrote in the second half of the decade. In addition to acquiring this aircraft at attractive pricing Volaris negotiated with Airbus the conversion of 20 A320neo to A321neo aircraft from our 2017 purchase order. Certain amendments to Mexican tax laws came into effect in 2022, including changes to provisions relating to value-added tax or VAT. The company is currently analyzing the full effect of the amendments, which could be material and the applicability to the Mexican airline industry. These provisions if applicable to the airline industry, would be limited to international flights to Mexico starting aboard, and could limit the ability of the company to credit a percentage of VAT paid in the company in connection with purchases of its own goods and services against the company's liability for VAT collected from its customers based on the proportion of those international flights. We believe that this amendments, while potentially appropriate for other industries, should not apply to the airline industry. As a result, we are evaluating all of our options to address and mitigate the issue. Moving now to Slide 11, assuming no significant disruptions related to COVID-19 regulatory, macroeconomic, and geopolitical events would impact Volaris' business on budgeting exchange rate of Ps.20.80 to Ps.21.10 per U.S. dollar. We expect for the full-year 2022, mid-20s growth in terms of ASMs compared to 2021, revenue in the range of $2.6 billion to $2.8 billion, CapEx in the range of $140 million to $144 million. We do not think it is appropriate to provide further guidance due to the current geopolitical and macroeconomic uncertainties, including the described Mexican Tax Law Amendments until we are better able to evaluate the respective potential impacts. We will leave Volaris is one of the best ultra-low-cost carriers with a healthy balance sheet, which allows us to continue executing our disciplined growth strategy, despite the four mentioned environment. Now, I will turn the call over to Enrique for closing remarks.

[Enrique Beltranena:]

Thank you very much Jaime and Holger. Moving now to the next slide. Volaris is committed to delivering growth during the following years through a sustainable corporate business model. In 2021, we continue to make progress in incorporating our ESG strategy unfolding it into our business, establishing meaningful environmental and social industry goals. Regarding our commitment to disclosing our performance on ESG issues, we're pleased to report that in 2021, we remained a member of the Dow Jones Sustainability MILA Pacific Alliance Index being the only airline in Latin America included in the index. For the first time, we are now a member of the ESG Mexican Stock Exchange product index. Finally, we have a resilient and effective ultra-low-cost global business model, a strong balance sheet with healthy leverage, a solid recovery with ample opportunities to increase our presence in our markets. And most importantly, the commitment of an experienced management team to help navigate their earning towards maintaining consistent and sequential levels of profitability. Despite the potentially volatile macroeconomic and geopolitical environment, we are optimistic about the company's growth. Thank you very much for listening. Operator, please open the line for questions.

[Operator:]

First question is from Duane Pfennigwerth with Evercore ISI. Please go ahead.

[Duane Pfennigwerth:]

Hi, thank you, and good morning. Firstly, just on your load factor, high 80s 87%. Just as we think about kind of the longer-term plan is high 80s kind of optimal for you. Is it mid-80s? How do you think about sort of the optimal ideal load factor for Volaris longer-term?

[Jaime Pous:]

Hi, Duane, good morning. As an ultra-low-cost carrier, we target some high load factors and high volumes. Obviously, seasonality plays a big role. So we typically see high 80s and low 90s in the high season and low to mid 80s in the low season. So an average of 85%, 86% would be our longer-term target.

[Duane Pfennigwerth:]

That's great. And then if I could, and I hope I don't go too far down the path here, but on the functional currency change, can you talk a little bit about what enabled you to do this? Was it just a function of your USD revenue increasing to a level that that enabled you to do this? And I know you said you're not going to sort of go back and restate anything. But could you just talk high-level obviously, we totally agree it's going to reduce the volatility quarter-to-quarter around the balance sheet. But maybe if we just look back at 2021, what would the impact have been on margins and on leverage?

[Jaime Pous:]

Just going up what a labor laws to change to U.S. functional currency going it's a combination of the revenue generation in dollars, the cost that we have in dollars, and the way we are basically determining our first and our ancillaries. So that enabled us to switch from Pesos to U.S. functional currency.

[Duane Pfennigwerth:]

Okay. And then just looking back, I guess, what would the impact have been on your margins, or your leverage say in 2021?

[Jaime Pous:]

I think in general what is going to take away is the volatility of the Mexican net FX swings from month-to-month. That also hurted our work equity portion, now. So now that we've changed the functional currency, we were able to get out of the natural hedge portion that impacted the way the market and the people view our numbers. So it's going to be more stable, the way we report without the hiccups on the exchange gains or the exchange loss since the percentage of Pesos is a lot lower than the U.S.

[Duane Pfennigwerth:]

Okay, great. And then just last one and again sorry for going too far on this. It's our understanding that the income statement would be converted at an average exchange rate and the balance sheet at a sort of quarter-end exchange rate. Is that how we should be looking at the financials historically? Thanks for taking all the questions.

[Jaime Pous:]

That's correct.

[Operator:]

The next question is from Josh Milberg with Morgan Stanley. Please go ahead.

[Josh Milberg:]

Hey, everyone, thank you for the event and congrats on the results. I had two questions related to your 2022 guidance. The first one is just the outlook you provided for the year gives a good sense of how overall TRASM could evolve. But I just wanted to ask for a little more perspective on how your ancillary revenue per passenger might perform this year. And if you could also give a little more detail on the one or two products that you see most driving the non-ticket upside. That would be great. And actually, what we're up getting is I also wanted to ask whether we might expect ancillary per pas to reach the 50% threshold? That's my first question.

[Holger Blankenstein:]

Hi, Josh. Thank you for your question. We continue to have an interesting pipeline of new products, which we're pushing through our booking system. We also talked a lot about personalization and better pricing in the past. And that's something that continues to evolve. And we see upside on that in 2022. So we do believe that we have some upsides in revenue per passenger in the ancillary revenues. Also interesting to note regarding the higher fuel price environment, ancillary products are less price sensitive with the customer. So we will see probably some price increases in some of our ancillary products as we go through this high fuel price environment. So we are targeting to reach 50% of revenues in the medium term. We don't have a time -- specific timeline on that. But that's certainly our target in the medium term.

[Josh Milberg:]

Okay, that's great, Holger. Thanks for that color. And the second one I had was, I got that you expect the FAA upgrade to come in the second half. It sounds like you're pretty confident that it will in fact come through. But I just want to understand if it were delayed, how much that could affect your growth for this year, the capacity growth. And if you could also just address what's left to be done in that FAA review process that would be great.

[Enrique Beltranena:]

So during the current week, the FAA assessment team has been working with the Mexican aviation authorities to continue to reviewing the progress of the corrective action plan, which I think had a significant progress. During this week, it seems that they were able to progress substantially in six areas of concern. The technical assistance continues working on it. And it's been visits of once a month to verify the progress and corrective actions. We continue sustaining that the process I mean, the next steps probably is to finish closing the 20 what 28 observations and then we need to we will have another auditor or another review of everything by an independent group, other than the one that's doing the assessment. We think that's going to take until probably the end of the Spring and after that, we'll see what happens. Having said that, so we think which is really important is if you look at our report, our incremental capacity in the last quarter of last year was 21% in terms of sense. So Volaris has been able to manage capacity and continue moving ahead with its capacity process into U.S. Through the end of the year, we really need the category and we really need to continue working on it. And we will be assessing whatever we need to do, I'll leave Holger to comment on the last quarter perspective.

[Holger Blankenstein:]

Thank you, Enrique. I just like to highlight two additional points. We do have two operating certificates in Central America, Volaris El Salvador and Volaris Costa Rica, which allows us to diversify our network not only to South and Central America, but also to fly directly to the U.S. from Central America, which will give us additional growth opportunities in the International market. And despite Mexico being in CAT 2, for the Mexican U.S. markets, on multiple routes, we have not reached the capacity limits defined for Volaris by the FAA in the CAT 2 process. And this will enable us to add capacity on existing routes to the U.S. even in 2022.

[Operator:]

Your next question is from Philippe Nelson with Citibank. Please go ahead.

[Unidentified Analyst:]

Hello, everyone. Thanks for taking my question. I had two questions actually, I'll start with the first one. The first one is quite simple. I just wanted to have a view on regarding the change in functional currency to U.S. dollars, I wanted to have a view on how much revenue do you generate in U.S. dollars compared to Mexican Pesos revenue?

[Enrique Beltranena:]

43%, so it is going to be around 40% and 45%, depending on the month.

[Unidentified Analyst:]

Okay, great. And the second one is regarding competition in tariffs. I know that we're seeing a lot of volatility in the few in those days regarding oil prices, but as far as you have seen in this first two months of the year and the last quarters, what is the extent to which competitor competitors are rising tariffs and recessing oil prices?

[Enrique Beltranena:]

So a couple of comments on pricing and demand and competitive environment. So in the fourth quarter, as you saw in our results, we demonstrated that we were able to offset fuel price increases with higher travel. And I think it's very important to note that, given our fuel efficient fleet of A320 neos. Our fares need to increase proportionally less than our competitors fares. On top of that, we have a high percentage of ancillary revenues that give us a competitive advantage in a rising price environment. As passengers, as I noted before, are typically less price sensitive to price rise in ancillary products. If we look at the market as a whole, we have observed that the domestic market has been a lot more rational in terms of pricing in the post-COVID era. And even through the first quarter of 2022, we have been able to increase fares on some trunk routes without impact on demand, despite significant capacity increases in those markets from Austin for a lot of competitors.

[Operator:]

The next question is from Pablo Monsivais with Barclays. Please go ahead.

[Pablo Monsivais:]

Hi, thanks for taking my question. Regarding new capacity deployment for 2022, in which segments are you expecting to deploy such growth. Since it seems leisure designations in Mexico are already very well served? What's -- where's the opportunity here? Or in other words, do you think that leisure travel is a bit over supplied? Thank you.

[Enrique Beltranena:]

So, regarding our capacity guidance for 2022, 25% is the midpoint that we're currently targeting. And the growth is going to be quite well distributed among international markets and the domestic market. We're going to continue to focus on building our core markets, which is the VFR and leisure segments in the center of Mexico and in our core markets of Guadalajara and Tijuana. Servicing leisure destinations and the big VFR destinations both in Mexico and the U.S. We see that the seat capacity in the Mexican market is just now reaching pre-COVID levels. And thus, we see that the market is absorbing this additional capacity very well. And demand is higher than pre-COVID levels. So we're seeing a very healthy market environment right now.

[Operator:]

The next question is from Alejandro Zamacona with Credit Suisse. Please go ahead.

[Alejandro Zamacona:]

Hi, everyone. Thank you for taking my questions. Two questions from my side. First one on the employee cost. So in the second quarter of 2021, you announced that 850 new headcounts in addition to other 2,000 headcounts in August 2021. So what can you say or what color you can give on the implementation progress of this plan? And what can we expect going forward in terms of employee efficiency savings?

[Jaime Pous:]

So our target for employee continues being a target of 58 productive ambassadors per aircraft. Having said that, with the growth that we have, and the growth that we're planning, we have to hire the number of employees that will report just now. We will continue sticking to our targets in terms of productivity of employees. And but we need to sustain the growth. So you can basically say that in terms of cost, that's going to be pretty stable. There's two elements that did affect the labor costs during the last quarter. The first one is the accrual of the DDU or the distribution of the profits to the employees, which is part of the new labor law.

[Alejandro Zamacona:]

Okay, thank you. And again, then my second question, if I may, in terms of M&A. So it seems that across America M&As is kind of resuming after . There was a recent investment from American airlines in Gol, the recent match on frontier and spirit. So in terms of Polaris, do you see any kind of opportunities in the short-term, medium-term for a conciliation?

[Jaime Pous:]

Alex, we are focusing on our organic growth. We are not thinking about the money. We're really focused on the business and executing the same as we have been not doing from past until today.

[Operator:]

The next question is from Hillary Cacanando with Deutsche Bank. Please go ahead.

[Hillary Cacanando:]

Hi, thank you. I'm calling on behalf of Mike. Thanks for taking my questions. Just talk a little bit about your cost outlook for 2022. And what are the primary drivers of cost inflation for 2022?

[Jaime Pous:]

Sure. At first, I want to go back to '21. If you look at the trend of '21 for what we did, just come in for 4.78, 4.08 with CASM. Despite inflation in Mexico and the U.S., you can see there the commitment that you have on the cost side. For 2022, I think the challenge is of course is going to be with delivery expenses and my take on expenses. Remember that we are substituting aircrafts from neos. So most of the cost is going to be impacted there. You can think about the range for 4.2 to 4.3 CASM ex-fuels, which is the mainly impact comes from that part.

[Hillary Cacanando:]

Got it. And then just you talked about healthy last minute demand in January and rising booking in February. I just wondering, if you could talk a little bit about March, like what you're seeing in the forward-looking numbers for March, and if there's anything notable there?

[Jaime Pous:]

Yes, I can give you some color on that. So what we're currently seeing in our booking systems is that sales and volume trends continue to look positive for the first quarter of 2022. We did have a small dip in bookings during the Omicron wave, which lasted approximately three weeks. But since early February, we have seen a consistent decline in COVID cases in the U.S. and in Mexico and in Central America. And that has been accompanied by more momentum in the forward bookings and for the period. So looking forward to the upcoming Easter holiday where we're excited about the Easter holiday and also the summer bookings. And that really points to how resilient the Mexican consumer has been. And we can really see a strong leisure demand gaining momentum in our markets.

[Operator:]

The next question is from . Please go ahead.

[Unidentified Analyst:]

Hi, thank you for taking my question. I have just one regarding on the CapEx on the '22 guidance. Could you give us a little bit more color about the increase from 2021 to 2022? This is going to be regarding on the expectation of receiving the aircraft. What will be the rationale on the increase of CapEx? Thank you.

[Jaime Pous:]

Most of the CapEx it's a connection with major maintenances solely the difference from year-to-year is basically comes from that.

[Operator:]

This concludes today's question-and-answer session. I would like to invite Mr. Beltranena to proceed with his closing remarks. Please go ahead, sir.

[Enrique Beltranena:]

Thank you very much operator. I would like to express my sincere gratitude to our family of ambassadors, to the Board of Directors, our bankers, or resource, our suppliers and most important to all of you the investor community for your commitment and support that has driven Volaris to this exciting position with such an opportunity going forward and the opportunity of growing this year. Thank you very much for everything, and have a great day and a wonderful weekend.

[Operator:]

This concludes the Volaris conference call for today. Thank you very much for your participation and have a nice day. You may now disconnect.