Controladora Vuela Compañía de Aviación, S.A.B. de C.V.
Q1 2019 Earnings Call Transcript

Published: 28 Apr 2019

[Operator:]

Good morning, everyone. Thank you for standing by, and welcome to Volaris' first quarter financial results conference call. [Operator Instructions] Please note that this event is being recorded. At this point, I would now like to turn the call over to Ms. Maria Elena Rodriguez, Volaris' Corporate Finance and Investor Relations Director. Please go ahead.

[Maria Elena Rodriguez:]

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 Vice President and CFO, Sonia Jerez. We will be discussing the Company's first quarter results announced this morning. Afterwards, we will move on to your questions. Please note that this call is for investors and analysts only. Any questions from the media will be taken separately. Before we begin, 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. Furthermore, Volaris undertakes no obligation to publicly update or revise any forward-looking statements. It's now my pleasure to turn the call over to Volaris' President and CEO, Mr. Enrique Beltranena.

[Enrique Beltranena:]

Thank you, Maria Elena. Good morning, everyone, and thank you for joining us today. Let me begin by giving you some key facts that demonstrate Volaris' strong first quarter 2019 improvement versus the same period last year. ASMs grew by 13%, passenger volume grew by 16%, launched operations in 16 new domestic routes and launch for sale 17 new routes. Total operating revenues increased by 23%. Total ancillary revenues increased by 30.5% TRASM increased by 9% in peso cents. Unit cost ex fuel reduction of 4% in peso cents. EBITDA margin improved 620 basis points, closing at 21%. Operating cash flow generation of MXN 3.7 billion, an improvement on MXN 1.3 billion. Volaris' passenger domestic market share at 32% versus previous year at 29%. On-time performance measured as arrival up to 15 minutes at 86.7%. Our schedule completion was 99.5%. This strong score card shows a healthy improvement versus the same period last year and very important continuing positive momentum quarter-over-quarter to the extent that TRASM increased in the first quarter 2019 was better than the first quarter of 2018 and 2017 as well than the last quarter of 2018, despite being a full low season quarter. Holger Blankenstein and Sonia Jerez will provide more detail on this improvement later on this call. Let me start tackling the first part. Revenue expansion was driven by strong domestic traffic facilitated by healthy ASM growth, driven primarily by higher more efficient utilization of our fleet. We continued to see robust consumer confidence, which strengthens demand for domestic flights in the Volaris-VFR transaction. The market has benefited from a reduction in international capacity from our competitors, especially in the transborder market. During the quarter, Volaris launched a new fare modality, which up sales key ancillaries to our passengers by combining the airfare with other separately sold products, including baggage as one of the most important. This innovative fare modality has boosted nonticket revenues for the quarter and has helped the market penetration of our ultra-low-cost carrier model. All these elements reflect the Company's focus on further improving its stock line and keeps on growing our ultra-low-cost carrier model penetration to the extent that as of March, passenger market share is already at 32%. On the unit cost side, unit dollars CASM ex fuel decreased by 9% versus the first quarter 2018. This unit cost reduction reflects the benefit of the Company-wide cost saving initiatives implemented last year as well as new initiatives, which have shown results in the first quarter. In the first quarter, the unit cost of the second largest Mexican carrier was double ours. Nevertheless, total U.S. dollar CASM decreased probably 4%, reflecting an increase in fuel prices due to a change from the Mexican suppliers transfer costs policy affecting all the industry. The Company has formally disagreed with incremental transfer costs and has been working to try to find these positive solutions. Combined, our unit revenue improvement and cost efficiencies generated basically breakeven first quarter EBIT by far better than first quarter of 2018. This improvement occurred despite the fact that the Holy Weekend, the Easter week took place in April. The surge in seasonal demand for Easter will be reflected in our results during the second quarter of this year. Operating cash flow generation in the first quarter was MXN 3.7 billion. During this period, the Company also repaid a short-term MXN 463 million peso-denominated working capital facility, which expired. We are reviewing alternatives in order to replace this peso-denominated financing facility. The Company has launched a tender for leasing support 22 new aircraft from original Airbus order to be delivered from 2020 to 2022 at competitive lease rates. This actually leaves the Company with fully financed PDPs, an assurance of lease agreements for these 22 aircraft until the end of year 2022. We have just launched our new leisure travel package platform, YAVAS, a Mexican colloquial term that means, off you go. This business allows Volaris to capitalize its popular travel website, which is the largest in Mexico in terms of monthly visits with more than 4.5 million per month. The Volaris booking website will refer traffic to a newly developed website that will allow Volaris customers to buy additional services including packages, book hotels, transfers, car rentals and entertainment as well as flight tickets. Now let me turn over to our Airline Executive Vice President, Holger Blankenstein, to go into detail about revenues and operations. Please, Holger.

[Holger Blankenstein:]

Thank you, Enrique. In the first quarter, we achieved a passenger volume growth of 16% year-over-year. We improved load factor by 1 percentage point while adding seats for departures. We grew capacity by double digits, the results of a more efficient, healthier utilization, notwithstanding the seasonal adjustment of not having the Easter high seasons during the quarter. In the domestic markets, the load factor was 85.3%, an improvement of 1.1 percentage points. And in the international routes, it was 78.6%, an improvement of 0.7 percentage points with respect to the same period last year. Total ASM growth was 13%, driven both by our new route and our focus on our core markets. Through our healthy capacity growth, we improved capacity production per aircraft per day. Domestic ASM growth in the quarter was 15%. VFR traffic is solid, and the bus market remains our most important customer segment, which helps us diversify our network by focusing on noncompeted routes to help sustain our double-digit growth. Domestic traffic continues growing despite capacity contraction from our high-cost competitors and even the regional carriers. The ultra-low-cost model is displacing the high-cost players in the Mexican market. We expect this trend to continue throughout 2019. In the international market, our ASM growth was only 7.7% due to a more measured growth by our -- and even capacity reductions by some players, we are observing a more sustainable Mexico to U.S. markets. In our segment of the transborder market, VFR passengers show solid demand supported in part by a strong U.S. economy and growth in remittances. In the first quarter, we launched operations in 16 new domestic routes and launched sale in 10 new domestic routes and 7 international routes. These new introductions are consistent with our business model to attract first-time flyers and develop point-to-point services on previously unserved routes, most of them already in operations as Volaris stations. We are building our presence in Chihuahua and Ciudad Juarez in the north of the country and Mérida in the Southeast, supporting the efforts of the new governments for economic growth in that region. The TRASM increase trend continues, supported by passenger traffic stimulation and strong ancillary performance. We achieved a year-on-year TRASM increase, which was MXN 1.261 for the first quarter, 9% higher than the first quarter of 2018. During the first 3 months of 2019, total ancillary revenues reached MXN 517 per passenger, an increase of 12% year-on-year, which accounted for 36% of total operating revenues. These positive ancillary results were driven by our dynamic pricing and digital conversions for à la carte portfolio. In the first quarter, we worked on several initiatives to boost ancillaries. Number one, we further fine-tuned dynamic pricing of ancillaries in terms of bags, carry-on and seat assignments. We launched a third fare modality, a low-base fare and a combination of the most important ancillaries for customers who do not want to select ancillaries à la carte in the booking process. This class fare has shown a good uptake. And finally, as Enrique mentioned, we launched yavas.com, our packaged holiday business, which will help us generate more commission revenues from the nonflight portion of the vacation spend. The rise in ancillary revenues allows us to grow revenue per passenger while providing us the flexibility to reduce yields and base fares in order to stimulate passenger demand. During the first quarter, we also achieved a significant milestone for Volaris. More than MXN 1 billion of sales in 2 days as part of our 13th anniversary promotion. This gives us a solid booking basis for the future without diluting TRASM. As I reported in our last conference, during 2018, we kept refining our bus route marketing campaign to better understand first-time flyers. The Volaris team undertook numerous field trips to emerge itself into the local emerging middle-class communities, to identify better and understand this segment's travel patterns. We identified a target core bus switching market of 38 million Mexicans that have never flown before. We are approaching them with our marketing campaign Volar C. Capacity allocated through Central America represented only 3.6% of our total ASM by the end of the first quarter of 2019 and help to contribute to a year-on-year volume improvement. Revenues for the U.S. route from Central America are performing well, and we will be adding Central America destinations to Mexico. Our codeshare with Frontier has already attracted over 60,000 customers between the 2 carriers. In the first quarter, we added 13 more connecting airports to the Frontier Volaris transborder network. We now operate out of 23 connecting stations. And our codeshare agreement has been welcomed by our joint customers, who have benefited from having access to destinations, which in some cases, were unavailable to them before. Through this codeshare, Volaris can now offer its customers 71 cities in the U.S. at virtually no incremental cost. During the first quarter, this represented 3.6% of customers flying on U.S. routes. Building on Volaris' 2019 organic growth forecast, these connecting stations will continue to provide additional opportunities for customers, opening more international routes during the years, resulting in additional opportunities to fly on a codeshare flight. In terms of capacity guidance for the second quarter, we are now planning to grow in terms of ASMs in the high teens for the entire network. The high growth for the second quarter can be attributed to the April high season, 17 new routes and a relatively low base in the second quarter of last year. During 2018, we only had one week of high season in the second quarter, while this year, we will have both, the Holy Week and the Easter week. To be clear, we are planning to achieve the forecast ASM growth through healthy capacity increases and higher utilization of installed capacity while increasing TRASM. In the second quarter of this year, we are adding only one fleet -- one aircraft to the fleet. The increase in growth comes from a more efficient utilization of the aircraft and thus more sectors per day. This is what we call healthy growth. We will continue to compete aggressively in the domestic market, simultaneously focusing on travel increase, profitability and building ancillary revenues. We will grow our business on the top line enabled by one of the lowest unit costs in the industry. This is a resilient formula, particularly in the -- in an emerging market. Now I'd like to hand it over to our Vice President and CFO, Sonia Jerez, to further discuss our financial performance for the quarter.

[Sonia Jerez:]

Thank you, Holger. I'll be reviewing our results in accordance with the figures filed with the Securities and Exchange Commission and Bolsa Mexicana de Valores. The Company adopted IFRS 16 as of January 1, 2019, using the full retrospective method. The cumulative effect of adopting IFRS 16 has been recognized as an adjustment to the opening balance as of January 1, 2017, as an increase in assets and liabilities as an adjustment in the retained earnings. The full disclosure of this initial adoption is included in the Company's 2018 annual report. As of March 2019, the IFRS 16 main effects are as follows

[Enrique Beltranena:]

Thank you, Sonia. Great job. Thank you to our ambassadors and our Board of Directors who remain committed to finding ways to increase efficiency and drive productivity. Thank you to you, our investors, for believing in our commitment through the continued development of our successful business plan. Today, I want to make a special mention through the big platform of our accounting and legal teams for their efforts on all the documentation that they filed today. Let me close by reinforcing some points raised earlier. Volaris unit cost reduction has become the most important competitive advantage of our company. Our objective is to continue growing Volaris' top line business aggressively with healthy capacity enabled by the unit cost advantage that we have mentioned, while we continue to generate operating cash flow. This formula is resilient and difficult for our competitors to match. It has positioned Volaris as an attractive high-growth investment opportunity in an emerging market with an underdeveloped air travel population. Thank you very much to all of you for listening. And now operator, please let's open the lines for questions.

[Operator:]

[Operator Instructions] We will take a question from Helane Becker.

[Helane Becker:]

So thanks very much for the time and for the great explanations. Just a couple of questions. The foreign exchange gain, I guess, is related to the accounting change?

[Sonia Jerez:]

Well, it's in part related with the accounting change, but also the most important point was the appreciation of the peso-dollar exchange that -- because we have a net liability position that give us this improvement in the net exchange rate.

[Helane Becker:]

Okay. And then the other question is, given -- two other questions, actually. One is, you're going from the first quarter, which was probably a, I don't know, tougher comp because of Easter and Holy Week into second quarter which you have a combination of Holy Week and then you have the start of the peak. So I guess, I'm kind of surprised there isn't a bigger sequential quarter increase. Is there something in the competitive situation that's holding it -- the airline back?

[Enrique Beltranena:]

Not really, Helane. Thank you very much for your questions. In reality, I think we've seen the top line evolving very well, and it's behaving in general well. But we do have this new way of calculating the transfer cost on the fuel in the lower part of the cost, which is something specific for Mexico, which is making our fuel cost equation by far much more expensive. And that's why we cannot reflect a higher job in our forecast for EBITDA.

[Helane Becker:]

Got you. And then just my last question is just in terms the competitive situation. I think, you mentioned that there's been a decline in some of the international markets. But is there like geographically anything you're noticing with respect to say, Mexico, U.S., transborder still driven more by people flying south than by VFR? Or is it still VFR okay?

[Holger Blankenstein:]

Well, Helane. Totally right. I mean, we're seeing some more rational capacity allocations in the international, especially the transborder market between the U.S. and Mexico. We've seen U.S. competitors pulling back out of -- capacity out of Mexico City and beach destinations and also some capacity rationalization in Guadalajara. However, in the VFR segment of the market that we operate in mostly, we've seen solid demand, and we've seen much healthier U.S.-Mexico market than last year.

[Operator:]

We'll move next to Michael Linenberg of Deutsche Bank.

[Michael Linenberg:]

I guess, 2 questions here. Holger, you've now -- you've given us a higher capacity growth rate in the June quarter. I think, you said mid high -- you said high teens. How should we think about your capacity growth rate for all of 2019? And if you could provide the split between domestic versus international, those 2 growth rates, that would be great.

[Holger Blankenstein:]

Sure. I'll start with the late -- last part of your question. The split between the U.S. and Mexico is going to be relatively similar. High teens for both the U.S. market and the Mexican domestic market. And then for the full year, we previously guided to 9% to 12% ASM growth, and that's going to be slightly higher, driven mostly by some additional capacities that we're able to put into the market for the April and the June quarter in total. So -- mid-high teens would be the guidance that we're giving out now.

[Michael Linenberg:]

I see, so instead of 9% to 12%, may be it's like 13% to 15% or something. That sounds kind of like what you're leaning towards.

[Holger Blankenstein:]

Probably more towards 15%.

[Michael Linenberg:]

Okay, for full year, okay. Okay, that's helpful. And then second question. You talked a little bit about good performance between the U.S. and Central America, and I think the plan is to add more service from Central America to Mexico in the coming quarters. I'm curious about the size of that operation today and where we end up by year-end just because one of your competitors in that market has recently pulled out a lot of capacity. I mean, a lot of markets have been pulled, probably half a dozen or more from Central America to the U.S. And I realize, I think you're in the process of setting up a Guatemalan subsidiary as well. So can you just -- I mean, I realized it's a small part of the business, but it does look like there's an opportunity as they say, you like to strike when the iron is hot. And it does seem like that with the carrier vacating or backing away from that market, it may create some opportunities for you that may be you weren't planning for 3 months ago. If you can just address that, that would be great, and thank you for answering my questions.

[Holger Blankenstein:]

Yes, so Michael, the Central American operation is now 3.6% of total ASM. We are seeing some opportunities to add capacity into that market. We are setting up an AOC -- an additional AOC, not in Guatemala, but in El Salvador, and we're progressing well with that process. We don't have a certain date on completion yet for that El Salvador AOC because it requires governmental approval. However, we are planning to add capacity to Central America throughout 2019. We currently operate that market with 3 A319s, and we see opportunity to add maybe 1 or 2 aircraft throughout 2019.

[Operator:]

[Operator Instructions] We'll move next to Ruben López of Santander.

[Ruben López:]

Congratulations on the results. One of my question was already answered, but the other one is related to new routes you opened in the quarter. Can you give us your initial thoughts on how they are performing versus your initial expectations? I know, it's still early, but any color can -- that you can share with us, it's great?

[Holger Blankenstein:]

So when we started operating 16 new routes in the first quarter, all of them were domestic routes. Some from Mexican city, but most of them from our core markets that are the bus switching markets where there was previously no air service and most of them are performing as we expected or even better than expected.

[Operator:]

We'll take our next question from Lucas Laghi of Citibank.

[Lucas Laghi:]

Just a question from our side. We are hearing some competitors complaining about high landing fees. What are your thoughts on this? And do you see any straightforward decline in net landing fees with Mexican airports? That's it from our side.

[Enrique Beltranena:]

Thank you, Lucas. Look, Volaris has taken a very, very strong stand against more increases from airport groups in Mexico City -- in Mexico, in general. We had a very important dispute with the Guadalajara airport, which was fixed at the end of it. And as a result of that, we're seeing a much more rational behavior from the airport routes.

[Operator:]

[Operator Instructions] We'll move next to Bruno Amorim of Goldman Sachs.

[Bruno Amorim:]

My first question is related to the operation Central America. Just wanted to better understand if the idea is to connect Central America with the U.S. through Mexico? Or if the idea is to do more direct flights from and to Central America? And also the second question on the competitive environment. It's a follow-up question. We saw Aeroméxico and VivaAerobús decelerating the pace of growth versus prior quarters. Are you seeing less competitions on route? Are they occurring or at least not growing in your specific routes? And if so have you already seen that reflected in prices? Or could we see all else equal better prices going forward is seasonally adjusted?

[Holger Blankenstein:]

So regarding your question on Central America, we launched direct flights from Central America to the U.S. last year into the key VFR markets where we have a large share of Central Americans living in the U.S., for example, Los Angeles. Our idea is to use our expertise in the VFR segment that we have developed over the last decade in Mexico and extend that through Central America. So we plan to add capacity directly connecting the U.S. Central America, number one. We also intend to use the network you have in Mexico to allow the Central American customers more options to fly to U.S. connecting to Mexico. So the answer is, we're going to do both, connecting and direct flights. That's question number one. Regarding the capacity allocations and what we see in the Mexico markets, we have seen the high-cost competitors be very more rational regarding capacity growth in Mexico. We're seeing relatively low growth from the high-cost competitors. And as Enrique mentioned, both high-cost competitors their total CASM in some cases is now double of Volaris' cost per available seat mark. So yes, we're seeing some capacity rational in domestic markets and the focus on both high-cost competitors in the international market.

[Operator:]

[Operator Instructions] We'll move next to Josh Milberg of Morgan Stanley.

[Joshua Milberg:]

My first one is a follow-up on the U.S.-Mexico transborder market. I think that in the prior quarter, you guys had highlighted some weakness there, especially on routes to major cities. And you mentioned today that you've been getting some help from competitor capacity cuts. But I was just hoping you could give a little more perspective on what you're seeing there? One of the Mexican airports we follow has been highlighting pretty substantial traffic -- pretty substantial pressure on traffic flows from the U.S.

[Holger Blankenstein:]

Yes, Josh. As we mentioned in previous calls, there was capacity glut after the liberalization of the bilateral between the U.S. and Mexico, especially in the Mexico City airport and some of the beach destinations. We have -- we are now observing more capacity rationality by many of the U.S. carriers into those markets, and we're also seeing some capacity reductions in the Guadalajara market to the U.S. And that's clearly a positive sign for the market as a whole and for Volaris in specific.

[Joshua Milberg:]

So Holger, you think that, that situation of a glut is now pretty much completely behind us?

[Holger Blankenstein:]

I think we are in the process of adjustments. I think, we're not there fully yet, but we're moving clearly in the right direction.

[Joshua Milberg:]

Okay, that's great. And I think my second question is for you as well, and it's just if you could update us on your thinking on the possibility of shifting to a strategy of owning aircraft in the wake of IFRS 16 and maybe just how you see the pros and cons of that potential shift?

[Enrique Beltranena:]

Josh, this is Enrique Beltranena. As we mentioned, we just launched a tender to propose leases on 22 aircraft for the Company. The same lease rate factors that we're seeing -- I'm sorry, the lease rate factors that we're seeing in that process are so good that we cannot make by our own the purchasing of aircraft, the following trading tour.

[Operator:]

We'll take our next question from Duane Pfennigwerth of Evercore ISI.

[Duane Pfennigwerth:]

Can you hear me okay?

[Enrique Beltranena:]

Yes, we can hear you, Duane. Thank you very much for being here.

[Duane Pfennigwerth:]

Perfect. Thanks for taking the questions. So wanted to just follow up to one of Helane's questions, just to check my understanding here. So under the old accounting, you were in a USD net asset position, and so you had these FX gains when the peso the lease in on depreciated. Under the new accounting, they've brought the leases on balance sheet, and so you are in a USD net liability position, and you will trigger gains when the peso appreciates. Is that correct?

[Sonia Jerez:]

Is that correct? Completely correct.

[Duane Pfennigwerth:]

Great, thank you. In terms of the 9% RASM growth -- the strong RASM growth that you posted here in the March quarter. I wonder if you could segment that at all domestic versus international? Were they similar, was it all domestic? How you saw that parse between the 2 segments?

[Holger Blankenstein:]

Duane, actually, it was very much across the board, both in the U.S. and Mexican domestic market. So very similar TRASM growth in all markets.

[Duane Pfennigwerth:]

Thanks. And then Holger, maybe to say with you, what ancillary initiatives are not sort of hitting full stride in the rate that you posted here in March. So what do you expect to continue to contribute incrementally versus both the level that you posted here in March?

[Holger Blankenstein:]

Clearly, on the ancillary side, we're going to see the run rate effect of some of the ancillaries we launched in the first quarter and last year, which is the first bag, the third fare modality that we launched in the first quarter and some of the commission-based revenues from yavas.com. We're going to see the run rate effect of that in the subsequent quarters. We're also planning on being even more aggressive on the dynamic pricings on some of the ancillary revenues and -- ancillary product, that should be a positive effect in the following quarters as well.

[Operator:]

And I'd be happy to resume the call back over to our hosts.

[Enrique Beltranena:]

So thank you very much to everybody for being here. I would like to you guys to remember 3 very important facts. 9% TRASM increase, 5.8% reduction on unit cost excluding fuel and cash flow generation were the 3 very successful measures that we presented today. Thank you very much for being here. Have a great day, and thanks for the support to Volaris shares.

[Operator:]

This does conclude Volaris' first quarter financial results conference call. You may now disconnect your lines, and everyone, have a great day.