Controladora Vuela Compañía de Aviación, S.A.B. de C.V.
Q1 2022 Earnings Call Transcript

Published: 30 Apr 2022

[Operator:]

Hi. Welcome to Volaris’s First Quarter 2022 Financial Results Conference Call. All lines are in a listen-only mode. Following the company’s presentation, we will open the call for your question 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 your questions on the platform and they will be either answered by management during this call or by Volaris Investor Relations team after the conference is finished. To send your questions via the webcast platform, you need to click on the question mark just below the video area in the upper left corner and type your inquiry. At this point, I would like to turn the call over to Renato Salomone, Volaris 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 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 first quarter 2022 results. Afterward, we’ll 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 as described in the company’s filings with the United States’ SEC and Mexico CNBV. These statements speak only as of the date of – that they are made, and Volaris undertakes no obligation to update or revise any forward-looking statement. As in our earnings press release, all our numbers are in US dollars and compared to the first quarter of 2021, unless otherwise noted. It is now my pleasure to turn the call over to Volaris’s President and CEO, Enrique Beltranena.

[Enrique Beltranena:]

Thank you very much, Renato and thank you, everyone for joining us today. We’re happy to report continued strong traffic and revenue results in the first quarter. In Mexico’s domestic market, we continue to see a strong recovery of demand that started a year ago. In other markets such as the domestic US, carriers have recently began to experience a similar recovery. On Slide 3 highlights that the key reasons behind our strong performance and success haven’t changed. First, Volaris has demonstrated an ability to adapt to change in demand quickly, and has also been able to gradually pass through the impact of the recent rising fuel prices. Second, Volaris has plenty of market opportunities, both at home and abroad. Volaris’s strength in the fair environment continues with our VFR customers who value our schedule reliability and our leisure customers attracted to our many point-to-point leisure destinations. Third, our growth plans remain flexible. And current demand strengths confirms that we can fill in the mid-20s ASM growth guidance for the year without sacrificing profitability. Fourth, our ultra-low cost and strong balance sheet allow us to absorb volatility better than our competitors and position Volaris well for the future. Regarding our first quarter performance, we generated total revenue of $567 million in the period, an increase of 80% versus 2021 and 53% versus 2019. We generated the positive cash flow from operating activities of $196 million. Our EBITDAR increased by 52% to $97 million. Today, I would like to focus on two main topics. Our ability to pass through the increasing fuel costs and the rationale behind Volaris’s growth strategy. Let me start with a pass through of the fuel cost. Volaris’s ability to pass through incremental fuel costs begins with the fact that we continue to have the lowest unit cost of any operator publicly trading in the Americas. We entered the first quarter with excellent entry-level base fares and ancillaries from the fourth quarter, which helped the company’s performance. The strong demand was sustained in both quarters, with an 87% load factor in the fourth quarter and 84% in the first quarter. Through the Omicron wave, we demonstrated the superior reliability of our operations once again. During the first quarter of 2022, Omicron negatively impacted demand in late January and early February. At that point, we pushed more for volume and at the same time, selectively increased base fares and ancillary prices. Once COVID cases decreased, we gradually pushed fares up without sacrificing volume. The incremental cost of fuel price and volume during the first quarter was $149 million, or a 157% increase versus the first quarter of last year. Volaris was able to pass through to revenues 95% of the factor in the quarter, sustaining a healthy 84% load factor for the period and closing the quarter with a TRASM level of $7.0. Due to the fare increases implemented throughout our inventory in the first quarter, we built a good foundation through forward bookings to gradually absorb the fuel cost pressure in the upcoming quarters. So far, in the second quarter, we have seen the strong load factor sustained and our forward bookings remain strong, demonstrating that our core VFR and leisure passengers are eager to travel and our current growth plan is consistent with this demand. So now speaking about growth, we have identified the recurring investment concern regarding Volaris’s growth strategy. Capacity growth in mature markets typically matches GDP growth. This is not true for Volaris’s core markets. Volaris operates in an emerging market with low air travel penetration. Over the last 10 years, the company’s ASMs compound annual growth rate was 13% versus Mexico’s average GDP growth of just 1%. We have managed to grow, while generating value for our shareholders and building a market-leading franchise that we believe is extremely difficult to be replicated by existing players or new entrants. And here’s why we believe we can sustain the growth trend with profitability. First, Mexico’s territorial size and population. The distance between Tijuana and Cancun is roughly the same as New York to Los Angeles or Paris to Jerusalem. And Volaris’s ultra-low fares are designed to stimulate demand in underpenetrated aviation markets such as Mexico. Much of the financial and revenue strength is concentrated in our three local core markets of Tijuana, Guadalajara and Cancun. Our network strength is primarily explained by our historical growth in Tijuana and Guadalajara. These two markets have been top performance for us. And we plan to continue to grow there primarily by adding frequencies to existing destinations. And this is not surprising, considering the GDP growth in this northern Mexican region resembles an emerging growth markets. We also plan to continue to grow in our southern Mexican market of Cancun. Although, GDP growth has been weaker in that Southeast region, tourism from outside the region continues to support and grow this unique destination. It is estimated also, that around 38 million Mexicans have migrated to the US in the last decades. Last year, they sent their co-nationals at home around $52 billion in remittances, equivalent to 4% of Mexico’s GDP. The remittance effect into an emerging market does not exist in a developed or mature economy. Our webpage has become a remittance system to transfer money from the US to Mexico for the relatives to fly. And the same effect we are seeing now in Central America. Speaking about Central American countries, have this three similar patterns and we believe we can successfully replicate in that region, what we have done from Mexico to the US in the last 16 years. The second fact are Mexico’s population characteristics. It is well known that one of Volaris’s target market is VFR middleclass. The company was conceived and perfectly fitted with its model to tackle this specific market. They usually travel with their relatives and are used to transporting themselves by bus from point-to-point, which creates a higher cost pressure for themselves. An essential component of our domestic growth strategy remains bus routes, and the switching from bus to air travel. We compete exclusively with buses in 46% of Volaris’s network, with no air competition. Having one of the lowest unit cost structures worldwide, we have successfully tackled the bus market and produced a low average base fare of $46 per segment, which is even lower in the domestic market. We have a more appealing value proposition than buses on trips larger than six hours. This is unique to Mexico, and Volaris has no conflict of interest that prevents us from grabbing market share from buses. Our target segment for our domestic growth is to appeal to the 90 million Mexicans who we have targeted to use buses to travel. This is equivalent to the total population of Germany. This emerging middleclass segment in Mexico is the fastest income-growing segment in our core markets. It grew 7% from 2010 to 2020 according to INEGI. We tailor our product by offering low base fares and promoting ancillaries designed to the needs of these passengers. As a result, 43% of our total revenues come from ancillaries, giving us a powerful formula to tackle the bus market profitability. The third fact are the air travel dynamics. As proof of our success, trips per capita in Mexico doubled to 0.55 from our founding in 2006 to 2019, and this indicator is now back to an uptrend Volaris accounted for 56% of the domestic aviation growth in that period, primarily with first-time fliers coming from the buses and virtually doubling the size of the domestic market in terms of passengers. Suppose, we aspire to be at Colombians, Chileans, Turkish or Malaysians air trips per capita. In that case, the Mexican domestic market could be 1.3 to 3.6 times bigger than today. We have identified over 325 potential new routes to grow that fit ideally with our low-cost, low-fare business model. However, we will do it this year by adding frequencies to our existing network. We remain flexible and discipline. And if we begin to see any sign of weakness, we will quickly rein in that growth. We’re also growing internationally in the US border VFR market, with 30% of our capacity. Toward the end of the year, we expect our transporter performance to be enhanced by fully optimizing our Codeshare partnership with Frontier Airlines. This is currently restrained by Mexico’s FAA category, which we hope will be upgraded by the end of the third quarter. Finally, we’re looking ahead to the future and positioning ourselves with international growth avenues. Central and South America, where we are growing from our separate air operator certificates in El Salvador and Costa Rica, with similarities in population characteristics and transportation dynamics. We believe that Volaris’s consistent performance demonstrates our resilience and adaptability. It is essential to highlight that, we are in a stronger financial position than before the pandemic with higher cash levels and lower financial debt, while all our earnings are now focusing on recovery and repaying the debt taken during the pandemic, Volaris is focused on executing its growth strategy. Our ambassadors remain a vital part of this strategy and I want to thank them for staying focused on providing a safe, reliable and consistent travel experience for our guests. Their efforts have been an essential part of our strong performance. 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 on to the next slide, I would like to provide some more color on our quarterly financial results. On the revenue side, we entered the quarter at a higher fare level, having increased fares gradually since December in response to rising fuel prices. Demand remained strong throughout the quarter, despite Omicron’s effect in late January and February. The strength in demand enabled us to push through careful fare increases during the quarter. This was the reason behind our strong TRASM performance which beat expectations. As far as monthly demand trends throughout the quarter, we reported a healthy January traffic performance, with a slight dip in forward bookings offset by healthy demand in closing bookings. In February, we observed a consistent decline in COVID cases, with a corresponding rise in bookings. 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 wave of COVID had less and less impact on our revenues. Our average fare for the quarter was $46 versus $37 a year ago, still low in absolute terms. Our fare increases were implemented selectively and in small amounts, ranging from $1 to $3 per passenger. We are also benefiting from the growth in our international markets, which are also driving up overall fare levels. On the capacity side, ASMs for the March quarter increased 1% from the December 2021 quarter or 50% versus the first quarter of 2021. Our load factor of 83.5% remained at healthy levels, increasing 5.4 percentage points year-over-year. Our first quarter domestic network, representing 70% of our ASMs grew by 41% year-over-year. Like last quarter, most of this growth was out of Mexico City on existing routes, with both VFR and leisure markets remaining strong. International capacity grew by 77% year-over-year. Most of this growth was in the Mexico to US market, where we also saw healthy demand. We also flew in Central America, where we are coming off a low base in the first quarter of 2021. We currently have 4 aircraft in this market. We attribute our success this quarter to our unique position of taking advantage of the bus switching momentum and being able to fill in the capacity abandoned by weaker competitors, which we now think is complete. We also believe there’s pent-up demand for traveling now that the COVID strain appears to be weakening. Overall, TRASM for the first quarter increased by 18% versus 2021 to $0.07. Load factor remains strong at 83.5%, with both leisure and VFR markets showing a continued strengthening in the quarter. As a reminder, Volaris has very little business traffic. Ancillary revenues continue to be a large part of our overall revenue mix. These consists mainly of baggage, seat selection and bundles like the flexibility combo. We also further drove growth in ancillary revenues this year by adding members to our discount programs and expanding the number of co-branded credit card members. 43% of our overall revenues were from ancillaries for the quarter and we reported $35 per passenger. Finally, total operating revenues per passenger increased 8% to $81. For 2022, our international growth will help continue to drive ancillary revenues, especially in the back half of this year. We remain focused on growing these revenues through a more personalized experience on our website. We had a fleet of 104 aircraft with an average age of 5.6 years at the end of the first quarter. For the same period last year, Volaris had 87 aircraft, a 20% growth. However, EBITDA per aircraft is now higher. We maintained high aircraft utilization during the quarter with 13.3 hours per day for our productive fleet. As a reminder, Volaris has one of the highest utilizations globally when measured against other airlines with similar aircraft types and airline models. And again, even though ASM growth was strong at 50%, we managed to stimulate demand and maintain a healthy load factor. During the first quarter, Volaris flew close to 500 departures per day, an increase of 55% compared to 2021, serving over 71 different destinations in Mexico, the United States, Costa Rica, Guatemala, El Salvador, Honduras and Colombia. Building upon our launch into Colombia last October, we recently opened for sale three routes to Lima, Peru, from Mexico City, Cancun and San Jose, Costa Rica for the start of flight service in June 2022. Looking ahead to the second quarter, the shift of Easter to mid-April has had a positive impact on TRASM. Our domestic bookings appear strong with both VFR and leisure markets solid. Our primary focus for growth remains to increase frequencies to existing destinations. On the international side, 90% of our capacity is from Mexico to the US, while our capacity growth remains constrained due to Mexico’s CAT 2, we benefit from high relative market shares in traditional VFR routes. Visiting friends and relatives account for most of our Mexico to US passengers, and our northbound leisure traffic also remains healthy. Central America is still relatively small, representing 3% of our capacity. We currently have four aircraft in the region. We saw 123% year-on-year growth driven by VFR and leisure traffic in the quarter. Overall, Central America continues to lag the recovery in the domestic Mexican market by three to six months. We are establishing our presence in the – in this region and we see a significant market opportunity over time. There is currently no other Central American-based low-cost carrier in this region, an area that is an emerging market with approximately 50 million inhabitants. We think we have a substantial opportunity to grow to more than 20 aircraft over the next five years. We characterize this Central American market as in its infancy with much promise as it grows up to scale. We expect to start flying directly with the Salvadorian operating certificate to the US in the second quarter. We see plenty of runway for growth. Our growth will be concentrated in the domestic market for the first half of the year, primarily adding new frequencies. Towards the end of the year, we expect more growth in the US with CAT 1 recovered and Central America as that region also recovers. Our plan has flexibility, and we will adjust depending on market conditions. Our three main avenues of network growth remain the domestic Mexican market, the transporter market into the US and Central America. Volaris’s three airlines operating certificates provide us with many strategic and flexible options. We’re currently budgeting ASM growth in the mid 20% range versus the entire year of 2021. And this percentage growth will be frontloaded into the first half, given the weak comps of the first quarter of last year. Consolidated ASMs for the second quarter of 2022 is expected to increase around 5% compared to the first quarter of 2022, implying about 20% ASM growth versus the second quarter of 2021. We believe that this additional capacity will be operated without traditionally high load factors. For the second half of 2022, our capacity growth will be in the mid-teens. Over the next five years, the main pillars of Volaris investment thesis stand, we will continue to benefit from organic GDP growth, population growth and 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 would like to discuss our first quarter 2022 financial results, highlighting our strong financial performance. Total operating revenues for the first quarter were $567 million, an 80% increase compared to 2021 as detailed by Holger. CASM ex-fuel for the first quarter decreased 8% compared to the same period of 2021, closing at . The company maintain its disciplined neutral low-cost structure, despite the inflationary pressures in Mexico, the US and Central America and a higher redelivery accruals associated with the renewal of our fleet. We have mitigated these pressures by focusing on controllable cost and higher aircraft utilization. Total CASM closed at $0.74 for the first quarter, a 13% increase compared to the first quarter of 2021, driven by higher fuel costs. The average economic fuel costs increased 64% to $3.15 per gallon in the first quarter. Confirming the financial benefit of the renewal of our fleet, Volaris’s fuel efficiency measure in ASMs per gallon improved by 6.1% from the first quarter of 2019 to the first quarter of 2022, resulting in fuel savings of 4.7 million gallons or $14.7 million. We believe this is an effective hedge against rising fuel prices, and means, that Volaris’s fares need to move up less than our competitors in this environment. Equally important, increasing fuel efficiency to the renewal of our fleet and the high density seating in our aircraft are critical elements of our 2030 goal of reducing CO2 emissions per RPK by 35%, compared with 2015. For the rest of 2022, the company expects to continue seeing volatility in fuel prices and additional inflationary pressures. Volaris’s management, we globally follow macroeconomic trends to react swiftly and we will continue to pursue further cost efficiencies to maintain a healthy cost structure. As discussed in our last conference call, certain amendments to the Mexican tax laws in 2022 include changes to value added tax. After a careful review of the reform and mitigation actions implemented by the company, we have quantified the annual impact in an approximate amount of $30 million, which is an increase of $0.08 in CASM. In addition, we have judicially challenged the amendments’ constitutionality via a legal proceeding. Volaris reported a net loss of $49 million in the first quarter, the company reported a loss per share of $0.04 and a loss per ADS of $0.42. EBITDAR increased 52% to $97 million, and the EBITDAR margin contracted by 3.2 percentage points to 17%. Net cash flow generated by operating activities in the fourth quarter was $196 million. The cash flow used in investing and financing activities was $6 million and $183 million, respectively. We believe that the company’s best use of cash is to continue to invest in our fleet and network for the future. Furthermore, Volaris delivered cash generation of $9 million for the first quarter, closing with $750 million in cash and cash equivalents, representing 31% of the last 12-month operating revenue. Volaris has one of the most robust balance sheets among the Latin American carriers and our global peers. At the end of the first quarter, our net debt to EBITDAR ratio was 2.3 times, compared to 11.2 times in the same period of 2021 and 2.5 times in the fourth quarter of 2021, a record level in the company’s history. In the past few months, the company has obtained financing at attractive conditions for the pre-delivery payments for 18 aircraft to be delivered in 2023 and 2024 in an aggregate amount of $262 million. We incorporated three new A320neo aircraft into our fleet during the first quarter. As of March 31st, 2021, Volaris’s fleet was composed of 104 aircraft with an average age of 5.6 years. Volaris’s fleet had an average of 188 seats per aircraft, 83% of its aircraft are sharklet-equipped and 46% on New Engine Option or NEO models. We expect to end 2022 with approximately 115 aircraft depending on Airbus delivery schedule compliance, increasing NEOs to 54% of our fleet, assuming no significant disruption related to COVID-19 regulatory and macroeconomic and geopolitical events with the impact on Volaris’s business and budgeting an exchange rate of MXN 20.5 to MXN 20.8 per dollar and an economic fuel price of $3.1 to $3.4 per gallon, we update our full year 2022 guidance as follows. Rate to rate, a mid 20s growth in terms of ASMs compared to 2021. Increase revenue by $200 million from our previous guidance to $2.8 billion to $3 billion. Introduced an EBITDA margin guidance in the high 20s. We expect the full year CASM ex-fuel to increase between 1% and 3% compared to 2021. Finally, we expect CapEx to be between $140 million to $145 million. And for the second quarter, we are guiding an EBITDAR margin of low-to-mid 20s. We are budgeting an exchange rate of MXN 20.1 to MXN 20.2 per dollar and an economic fuel price of $3.7 to $3.8 per gallon for the quarter. We believe Volaris is one of the best run ultra-low cost carriers globally with a healthy balance sheet. This allow us to continue executing our disciplined growth strategy with a flexibility to absorb macroeconomic volatility brought by geopolitical events. Now, I will turn the call over to Enrique for closing remarks.

[Enrique Beltranena:]

Thank you very much, Jaime. Finally, we have a resilient and effective ultra-low cost business model, a strong balance sheet, a 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 our airline towards maintaining consistent and sequential levels of profitability. In a volatile market, distinguishing between is crucial. Over the past six quarter, Volaris had a cumulative EBITDAR margin of 33%. And we believe we can deliver a similar cumulative EBITDAR margin in the next six quarters. This statement shows the confidence we have in Volaris business model and in our ability to remain one of the most profitable airlines in the world. Thank you very much for listening. Operator, please open the line for questions.

[Operator:]

Thank you. The floor is now open for questions. Participants can also send questions via the webcast platform, you need to click on the question mark just below the video area in the upper left corner and type your question. Our first question comes from Duane Pfennigwerth with Evercore ISI. Please go ahead.

[Duane Pfennigwerth:]

Hi, thank you. Good morning. First just maybe an easy one. I noticed you put fuel price now in your monthly traffic which I think might be helpful for some. You know we hear from investors just a little bit of frustration that some of the analysts on the Street are not sort of timely updating things based on where fuel prices are, which of course, you know we can see every day. But now you put it in your traffic as well. So I wonder if you would just comment on where you think fuel prices will settle out here in 2Q or if you have sort of a spot fuel price just to help you know everybody that’s on the line here?

[Operator:]

Pardon the interruption. It appears we have lost connection to our main speaker location. Please stand by while we reconnect. Pardon me, ladies and gentlemen, we have reconnected our speaker line, Duane Pfennigwerth with Evercore ISI. Please resume your question.

[Duane Pfennigwerth:]

Sure. Will try again. Hi, and good morning. I just wanted to ask you if you had a good estimate for 2Q fuel or a spot fuel number that you’re realizing today and I wanted to commend you for putting fuel in the monthly traffic.

[Jaime Pous:]

Thank you, Duane. Basically the guidance that we provided in the economy fuel price between $3.7 to $3.8, but we use with the spot WTI of the forward crude that was like $108.28. The crack that was at $34.75 and yet at $3.41. Is – the curve is what we use and nothing complicated and we will continue to publish together with a traffic report as we did in March, the average economic fuel price that we had during the month.

[Duane Pfennigwerth:]

Okay. You feel – I know you put that in there for the year but you feel like that’s the right number for 2Q like what would your spot fuel price be right now?

[Jaime Pous:]

The spot price right now is – do you have a number that are relatable? We have it yet about 4.09. But that – what the numbers that I provided to you, Duane are the numbers for the Q for the complete Second Q.

[Duane Pfennigwerth:]

Okay, okay, perfect. And then just a broader question for my follow-up, maybe for Enrique is, we just step back and think about how the world has changed in the last few years you know supply chain disruptions sourcing from Asia, a global energy supply disruptions. It just feels like there are a lot of ingredients for a closer relationship between the United States and Mexico there is clearly potential. Of course this potential can be delayed with political cycles in the US and in Mexico. But how do you think about this potential for a closer relationship? And what should US investors be watching for what signs should be – we be looking for that this relation – relationship is improving or maybe getting more distant?

[Enrique Beltranena:]

Well, Duane some – some days I think things are going really well. Some days I think that things are not going in the right direction. I think, in general, during the last month, the relationships have been really tense, because of the energy reform, which is already solved, I would say as part of the link of the issue of the possibility of changing the constitutional decree in relation with the energy reform and the voting that happened two weeks ago at Congress and Senate. So, I would say that, yes, on one side because of the new world order, we need better relationships and improved relationships more and more, but it’s up and down every day.

[Duane Pfennigwerth:]

Appreciate that perspective.

[Operator:]

Our next question comes –

[Enrique Beltranena:]

Having said that exports and the whole economical trade between the two countries is moving ahead really well. Go ahead, the next question, please.

[Operator:]

Thank you. Our next question comes from Helane Becker with Cowen. Please go ahead.

[Helane Becker:]

Thanks very much, operator. Hi, everybody and thank you for the time this morning. So I just have two questions. The first question is on your – just a point of clarification, second half capacity growth up in the mid-teens? Is that system right that’s all the operating divisions, El Salvador, Costa Rica, just everything, not just Mexico.

[Jaime Pous:]

Yeah, correct, Helane.

[Helane Becker:]

Okay, thank you. And then my other question is with respect to bus shifting. As you get further and further into you know for people knowing Volaris, is there ever been a time where somebody has said, they’ve taken the plane and then they’ve said, no, we’re just never going to do that again?

[Holger Blankenstein:]

Well, Helane, our data shows that once we have people switched from buses to air transportation, on the longer routes, bus trips beyond six hours, people are very reluctant to go back to the buses, more than 90% of our customers remain loyal customers to us. And we build our network around that market, to remind everybody, we have 46% of our routes that only compete against the buses. So we continue to believe that there is a potential to switch more people from the buses to air transportation in the next years.

[Helane Becker:]

Great, that’s very helpful. And then the only other thing I have is, any word on when CAT 1 will be restored?

[Enrique Beltranena:]

Yeah, Helane. What we saw that Mexico had a new always two, three weeks ago, the 20 points which in reality have 97 different topics organized on their reservations were basically closed, and the FAA is sending a new how the team during the second week of May do a full assessment again, we’ll see depending on the results Mexico will request to - the return of CAT 1. And that process after that done it can take from two to three months, we hope Mexico will return to CAT 1 by let’s say the end of the year – by the end of the year.

[Helane Becker:]

That’s great. Thank you very much.

[Enrique Beltranena:]

Thanks, Helane.

[Operator:]

Our next question comes from Mike Linenberg with Deutsche Bank. Please go ahead.

[Mike Linenberg:]

Hey, good morning, everyone. Hey, Holger, back to kind of the long-term plans for your Central American operation you talked about you know over time 20 airplanes five years out. Does that include any service that you would be flying to South America or is that a separate segment?

[Holger Blankenstein:]

Michael, we see medium-term potential of 20 aircraft as you rightly say, and that is for our El Salvadorian operating certificate and the Costa Rican operating certificate flying to the west Mexico, intra Central America and South America. So it includes the whole thing.

[Mike Linenberg:]

Okay. Okay. And so, I guess as I think about South America, it looks like it’s going to be both your Central American certificates as well as your Mexican certificates. So it’s sort of a combination of both. That’s probably the right way to go –

[Holger Blankenstein:]

You’re right.

[Mike Linenberg:]

Okay.

[Holger Blankenstein:]

That’s right, Michael.

[Mike Linenberg:]

Okay. And then just with respect to you know corporate travel and you know maybe even price sensitive business or you know even more granularly you know small, medium enterprises, you know, Holger you came out and just said, look, you know, we don’t – we carry very little business traffic and I know you’ve always carried some, but I keep looking at that market share chart and you’re up to you know you’re north of 40%. You know you’re sizable in the marketplace, and there are lot of city pairs that you serve that nobody else serves. And I don’t see corporate people taking the bus. Isn’t there a real opportunity here for – Volaris to snag just a bigger share of corporate even if it’s the most price-sensitive corporate? I’m very curious on kind of your long-term plans on that, because it seems like it’s a real profitable opportunity. And maybe you’re just not going after?

[Holger Blankenstein:]

Yes, absolutely. I think as the largest player in Mexico, we have to look at all market segments. We have recently fortified our trunk routes out of Mexico City to Monterrey and Guadalajara. And as you rightly point out, we are getting some of the price-sensitive business customers, especially in the small and medium-sized enterprise segments. We have also introduced some features of ancillary bundles that are geared towards more the corporate customer, more of the business customer, we have a new bundle called v.business that gives the business customers some more optionalities in exchange for an additional fee. So we are actively looking at that segment. And as we grow in the domestic market, but also to the largest destinations in the US, we are bound to make inroads into that segment. Having said that, we do recognize that business traffic is still below pre-pandemic levels, and that the VFR and leisure segments are much more resilient in the recovery.

[Mike Linenberg:]

Okay. Can you just remind me like pre-pandemic was price-sensitive business or SMEs? What was that about, 10% of your – you know of your sort of passenger, if you look across your passenger segments or revenue was at 10%, maybe it was less than 10%?

[Holger Blankenstein:]

Yeah. It was about 20% of our traffic, pre-pandemic, mostly domestic, where VFR was about 50% and leisure was about 25% to 30%. So, that was pre-pandemic. And we’re seeing slightly higher VFR and leisure participation right now, because precisely the business traffic is still behind pre-pandemic levels.

[Mike Linenberg:]

Okay. Okay, that’s helpful. Okay, great. Thanks. Thanks, everyone.

[Holger Blankenstein:]

Thank you, Michael.

[Operator:]

Our next question comes from Stephen Trent with Citi. Please go ahead.

[Stephen Trent:]

Good morning, everyone and thanks very much for taking my question. Kind of a quick follow-up on what Helane was asking about the bus, if I may. You know when I think about the – you know the potential for enhanced offer going from bus to plane you know are you aware of any of these interstate bus operators that you know even have any sort of loyalty program or something that remotely looks like a loyalty program? And you know and I would guess that you know they probably don’t have stuff like Ya Vas or co-branded cards, just sort of wanted to get a little bit of a high level color on the potential difference in that offer? Thank you.

[Holger Blankenstein:]

Yeah, absolutely, Stephen, you’re right, we have enhanced our product offering to attract customers with service elements and products that are not available on the buses, precisely the package holiday options and our v.club, which gives the most price-sensitive customers some additional discounts. And also I’d like to point out that the buses are relatively unsophisticated prices in terms of revenue management, which gives us an advantage in yielding and generating more revenues per passenger.

[Stephen Trent:]

Okay. Super, Holger, thank you. And just one really quick follow-up just any high level thoughts about you know how the ops are going so far in St. Lucia and you know kind of customer reaction and et cetera.

[Enrique Beltranena:]

Those are in the level of 78% in the three routes that we have. We are observing the market to develop, we’re observing the route, the ground routes to improve. And we’re watching the entire operations very carefully. And that’s the update that we have. We did launch a requirement to the IFR to start flying from St. Lucia to LAX at the end of the year. And that’s where we, we strongly think that that reinforces the VFR traffic of the region around the airport.

[Stephen Trent:]

Okay, very helpful. Thanks very much for that, Enrique.

[Operator:]

Our next question comes from Pablo Monsivais with Barclays. Please go ahead.

[Pablo Monsivais:]

Hi, everybody, thanks for taking my question. I just have a follow-up to Holger’s comment on the pent-up demand. The demand recovery has been impressive. So I am so curious to learn this idea that there’s still pent-up demand driven because of COVID. I thought that leisure was already back to pre-pandemic levels, perhaps VFR as well. But if you can provide a little bit more color on that, if there’s a low-hanging fruit still that you’re planning to improve over the next few quarters? Thank you.

[Holger Blankenstein:]

Yeah, Pablo. Let me give you some color on how we’re seeing things right now in terms of sales and forward bookings. So, you might remember that during the Omicron episode, midway through the quarter, we did see a reduction in sales, three-week episodes, where we did have a small impact for the quarter. This was obviously a seasonally low time of travel for us anyway. And then, we had a very successful anniversary promotion which is mid-March. And we saw that demand and pricing strength continues, especially for forward bookings into the second quarter and even into the second half of the year. And that strength of the bookings has really continued into April. We continue to be excited about the summer. And I think that really points towards that pent-up demand that you’re mentioning, the resiliency of the consumer, especially in our segments, the leisure, the VFR segments. And they’ve been proven very strong and we’re seeing that strength continue carrying us forward. So, we continue to be quite constructive about the top line going into the second quarter.

[Pablo Monsivais:]

Perfect, very clear. Thank you very much.

[Operator:]

Our next question comes from Alejandro Zamacona with Credit Suisse. Please go ahead.

[Alejandro Zamacona:]

Thank you. Hi, Enrique, Holger, Jaime and thank you for the call. Just a quick question on your thoughts on how the Mexican market has been accepting the price increases in the base fares consider – considering that future increases may come amid the higher oil prices and the higher inflation environment. So, any color on that might be very useful. Thank you.

[Holger Blankenstein:]

So let me tell you that as we mentioned during the call in the first quarter, we demonstrated that we were able to offset 95% of the fuel price and volume increases and we sustained healthy load factors and traveling level. So the customer really did accept our price increases. Now, oil price increases obviously affect the entire transportation and tourism industry and given our cost structure and network and market position, we believe that we are extremely well positioned to pass on some of the effects of rising fuel prices to our customers even in the future. Nevertheless, we do need to emphasize that as an ultra-low cost carrier, our prime focus will always be the focus on volume first. And if you look at our fuel efficient fleet of A320neos, our fair price increases, need to increase proportionately less than our competitors’ fares. And then if you look at the market as a whole, we have observed in the domestic market, a lot more rationality in terms of pricing in the post-COVID era, from all the remaining competitors. So, we continue to be positive about being able to partially offset fuel price increases into higher travel.

[Alejandro Zamacona:]

Okay, Holger, thank you. And then my second question, if I may. Do you have any of the potential overturning of mass mandate in Mexico similar to what happened where we saw in US? And eventually, we do believe that the restriction lift could improve demand or it can even hurt customers’ confidence to travel safe?

[Enrique Beltranena:]

So look there’s two answers for this. The first one is what’s going on in the domestic Mexican markets where Mexican flights we continue to have a compulsory mask usage policy, because that’s what the authorities’ requirement. And the second one is, what we’re doing in the north bound and international flights, where we moved from a compulsory usage to a strong recommendation of using the mask.

[Alejandro Zamacona:]

Okay. But do you believe we have any update on the potential level during – of the mask mandate in Mexico?

[Enrique Beltranena:]

Not yet. No indication so far by the health authorities.

[Alejandro Zamacona:]

Okay, thank you.

[Operator:]

This concludes –

[A - Enrique Beltranena:]

Okay, thank you –

[Operator:]

Today’s question-and-answer –

[A - Enrique Beltranena:]

Thank you very much to everybody. And I want to apologize because of the system short – that we have. I want to express my sincere gratitude to our family of ambassadors, the Board of Directors, investors, our bankers, lessors and the suppliers for the commitment and support that has driven Volaris to this exciting position with such an opportunity. Thank you very much to everybody and it was great to hear you and participate in this call.

[Operator:]

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