Controladora Vuela Compañía de Aviación, S.A.B. de C.V.
Q4 2018 Earnings Call Transcript

Published: 22 Feb 2019

[Maria Elena Rodriguez:]

Good morning, everyone, and thank you for joining the call. With us today is our President and Chief Executive Officer, Enrique Beltranena; our Airline Executive Vice President, Holger Blankenstein; and our Vice President and Chief Financial Officer, Sonia Jerez. We will be discussing the company’s fourth quarter and full year 2018 results. 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 on an individual basis. Before we begin, please let me remind everyone that this call will 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 or 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 Chief Executive Officer, Mr. Enrique Beltranena.

[Enrique Beltranena:]

Thank you, Maria Elena. Good morning to everybody, and thank you for joining us today. Throughout 2018, our commercial efforts and cost-efficiency initiatives helped us overcome a very challenging year, a year with significant moves in fuel, along with the changing geopolitical landscape in Mexico. Let me give you some examples of what we accomplished during the year, and I’ll start with TRASM. TRASM increased 8.4% year-over-year in the fourth quarter, following a trajectory of sequential quarterly improvement that was the result of the company’s efforts to recover top line total revenues. This result exceeded our guidance and put us back above 2017 levels. The TRASM increase represents a 23% improvement versus the first quarter of 2018. Volaris achieved a full year reduction in unit costs, excluding fuel, of 9.3% versus 2017 in U.S. dollars sense, fully offsetting a 29% annual average economic fuel cost per gallon equivalent to MXN 2.9 billion. This was the realization of a bottoms-up company-wide cost-savings initiative. As a result, the total U.S. dollar TRASM for the year remained at the same level as the previous year. We were and we are fully dedicated to maintaining our ultra-low-cost structure, which remains among the lowest in the industry. The combination of the unit revenue improvement and efficiencies produced a positive second half EBIT of MXN 601 million or 4% margin and EBITDAR of MXN 4.1 billion or a 27% margin, reflecting our commitment to turn around our main indicators. Our fourth quarter results were even better than the third quarter, showing a sequential improvement with an EBIT of MXN 365 million or 4.5% margin and EBITDAR of MXN 2.1 billion or 27% margin. As a result, Volaris was able to finish the full year with a positive operating cash flow generation at MXN 566 million for the 12 months and MXN 102 million for the fourth quarter. However, despite the huge effort from the team to improve both TRASM and CASM, the improved and positive performance during the second half was sadly not enough to offset the operating losses from the first half. Volaris grew ASMs by 12% in the fourth quarter. The main growth driver was the healthy capacity generated by better utilization of our existing assets. Aircraft utilization was up 5% for the full year, with passenger growth of 12%. Holger Blankenstein will report that an important percentage of our passengers were first-time flyers. It shows that our growth is mainly driven by the generation of new passengers resulting from the better penetration of the ultra-low-cost model and the bus switching. Consequently, Volaris ended 2018 as Mexico’s number one carrier in the domestic market. In 2018, the company faced tough competition from the beginning of the year. But in the second half, we saw a better revenue environment, especially in the transborder market. The consumer confidence index in Mexico kept on soaring to record highs. In January 2019, it scored its highest level since 2001, climbing 32% year-over-year to 112%, showing a constructive outlook for the current year and most important for our VFR traffic. The U.S. economic performance drove stronger wages that helped support our VFR traffic, and remittances grew 11% in 2018 versus 2017 that helped drive domestic traffic. These positive economic trends worked with our network and capacity adjustment efforts to produce the improved second half 2018 top line results discussed earlier. Now let me pass it over to our Airline Executive Vice President, Holger Blankenstein, to elaborate further on the drivers of the revenues. Holger, please.

[Holger Blankenstein:]

Thank you, Enrique. In the fourth quarter, we achieved strong volumes. In the domestic market, the lowest CASM was 89.5%, 3.6 percentage points better than in 2017. The international markets recovered to 79.4%, 4.2 percentage points higher than the same period last year. Central America continues to be a small piece of our business but also contributed to volume improvements versus 2017. Domestic ASM growth for the quarter was 14%, driven by more capacity in our core markets of Guadalajara and Tijuana. And thanks to new routes, we were able to bring lowest fares with customizable travel options to more people and more places. This is a healthy capacity growth achieved through increasing daily utilization and improving capacity production per aircraft per day without sacrificing operational indicators. In the transborder market between the U.S. and Mexico, our ASM capacity growth was only 7%, as we still see some weakness in the demand in major routes. In the fourth quarter, we launched operations in six new domestic routes and three new international routes from airports where we already had a presence. For example, we opened Bajio to Puerto Vallarta and Bajio to Sacramento. The total fare environment has also improved. We were able to stimulate demand and absolute revenue, which resulted in a positive overall effect on TRASM. For the first quarter of 2019, we expect this positive TRASM trend year-over-year to continue, supported by robust bookings and ancillary revenues, this despite the drag on the first quarter 2019 due to a shift of the Holy Week and Easter high season to mid-April this year. Regarding the domestic competitive environment, Volaris has been successfully boosting and defending its core markets. Meanwhile, we have observed more cautious capacity additions from the high-cost competitors with practically zero growth while the ULCCs continued to penetrate the markets. Nevertheless, Mexico total domestic market grew once again at double-digit rates in 2018. In the international market, Volaris has acted swiftly and carefully, reducing capacity in several U.S. markets where we have seen lower demand growth. We are also observing capacity adjustments by several Mexican and U.S. players, especially in the California market and on routes between large cities in Mexico and the U.S. such as Chicago, Miami and New York. In 2018, we kept refining our bus switching marketing campaign to better understand first-time flyers. The Volaris team undertook numerous field trips to immerse itself into the local emerging middle-class communities to identify and better 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 new marketing campaigns we called Volaris C. We also refined our marketing split in the U.S. market, advertising in locations such as laundromats and metro stations and areas with high share of Hispanic populations. It is important to mention that in the full year of 2018, we increased passenger volumes by 12%, and one-third of that growth came from first-time flyers that we were able to switch from buses, which is our key traffic target group or the visiting friends and relatives segment in the emerging markets we operate in. During the fourth quarter, non-ticket revenues performed exceptionally well, reaching MXN 512 per passenger, an increase of 21.3% year-over-year. Ancillary revenues accounted for 32% of total operating revenues, up 4.8 percentage points year-over-year. These positive ancillary results were driven by our customer-centric approach. We simplified our booking process and enhanced our customer experience for our most relevant product. We continue to develop strong dynamic pricing strategy, maximizing revenue and product conversion. Finally, our co-branded credit card and the v.pass subscription program continued their strong growth. We see substantial opportunities to grow non-ticket revenues even further in the following years. Central America operations keep maturing. Capacity allocated to Central America represented 3.5% of our total ASMs by the end of 2018, driven mostly by the new flights from Central America to the U.S. Total unit revenue trends in the region are improving, and the ultra-low-cost model is more and more accepted by the passengers in Central America. For 2019, we plan to moderately increase Central American capacity and add two to five new destinations, which we will announce shortly. Our codeshare with Frontier is operating at eight connecting airports and over 100 new connecting routes. This represents for Volaris 64 U.S. – new U.S. destinations. In December, codeshare passengers accounted for almost 4% of customers in the Mexico-U.S. routes. For 2019, we plan to implement some codeshare activity enhancements such as increasing connecting airports to 21 and connecting countries other than Mexico and the U.S. We are also looking at cost synergies at certain U.S. and Mexican airports. Volaris had invested in digital technologies under the ultra-low-cost model that improve seamless communication with our customers throughout their travel experience. These tools have increased Net Promoter Scores year-over-year while reducing operating costs. We were recognized by air travel intelligence company OAG and airline ratings for our on-time performance and safe operation. Completion factor, on-time performance and bag lost ranked among the best for the full year. Regarding guidance for 2019 and the first quarter, we are planning capacity growth in terms of ASMs for both periods between 9% and 12% year-over-year for the entire network. Again, we are planning to achieve this mostly through healthy capacity without sacrificing operational integrity. To date, we have announced the launch of six new domestic routes and three new international routes in 2019, again focused on our core niche market with bus competition, for example, Dallas to Durango and Phoenix to Puerto Vallarta. The company reviewed and reduced its aircraft arrivals for 2019 to the lowest level than the last years. Three net new sales. This breaks down into five new deliveries, which is one A321neo and four A320neos with lower fuel burn and the return of two A319ceos, ending the year 2019 with 80 aircraft. This aircraft growth is in line with the softening outlook of GDP growth that is in line with the slowdown in capital investment in the Mexican economy. Overall, we are very pleased with how well our ticket and non-ticket initiatives performed in the fourth quarter and at the start of this year. The overall benefits from our network and scheduling changes while maintaining the reduction on sales, marketing and distribution expenses in 2019 will help drive improved results at the end of the year. Now I’d like to turn over the call to our Vice President and CFO, Sonia Jerez, to elaborate on our financial performance for the quarter and further detail on our guidance.

[Sonia Jerez:]

Thank you, Holger, and hello, everyone. I’d like to be here with you and on – with you all on my first earnings call as the CFO of Volaris. I feel very fortunate to be part of this very professional and passionate team in finance. Before I begin, I want to thank you, Carlos Gonzalez, Corporate – current Corporate Control and Compliance Director, for his great work as the Interim CFO. Now I’ll review our results for the figures filed with the Securities and Exchange Commission on Bolsa Mexicana de Valores. During the fourth quarter, CASM ex fuel decreased by 12% year-over-year to US$0.043. Our most important strategy to reduce CASM was to manage a healthy capacity. We not increased our work hours for the quarter by 11.2% during the year but also increased productivity on our aircraft utilization. U.S. dollar CASM ex fuel for the year decreased 9.3% year-over-year through many significant cost reduction initiatives implemented throughout the year. Total CASM for the fourth quarter decreased 1% year-over-year to US$0.07. Volaris offset the fuel price increase of 33% by cost savings initiatives such as network [ph] redesign, high-density seat configuration of 185 seats per aircraft at the end of the year, administrative efficiency, including headcount control and labor cost control, and commercial strategy of direct distribution channels with 80% online channels that lower our sales, marketing and distribution expenses, among others. These numbers includes one-off challenges associated with our restructuring plan, especially with regards to severance and financing costs. Moving on to our fleet. Neos now represent 20% of our fleet. Our seat plan will bring this number to over 50% by year-end of 2022. Neo engines give us 16% to 18% lower fuel burn in addition to the advantage of the current competitive lease rate factors, which supports our ultra-low-cost strategy. We have four new aircraft deliveries in the fourth quarter 2018, ending the year with 77 aircraft. 53 of the seats were in the sharklet-equipped aircraft, improving fuel burn in our fleet. For 2019, we only plan to bring net new shares through sales and leaseback transactions. Total operating revenues were MXN 7.9 billion for the fourth quarter and MXN 27.3 billion for the full year, representing increases of 21% and 10.2%, respectively, versus last year. We were able to achieve a consecutive TRASM improvement of MXN 1.30 for the full year, almost at the same level as 2017. During 2018, U.S. dollar-denominated collection represented 26% of the total revenue, helping us to insulate approximately two-thirds of the company’s total costs, so strengthening the company’s effort will have a natural hedge from a diversified network. In line with our guidance, adjusted EBITDAR in the fourth quarter was MXN 2.1 billion, reaching an EBITDAR margin of 27%. EBIT was MXN 355 million for the quarter, representing 4.5% EBIT margin. For the full year, we had an adjusted EBITDAR of MXN 5.9 billion, 21.7% margin and a negative EBIT of MXN 888 million, a negative 3.2% margin. Net income for the quarter was MXN 511 million with a net margin of 6.5%. The earnings per Series A share was MXN 0.51 and USD 0.26 per ADS. Net cash flow provided by operating activities were MXN 102 million and MXN 566 million for the fourth quarter and full year, respectively. Year-over-year, the cash and cash equivalents for the fourth quarter and full year decreased by MXN 218 million and MXN 1.1 billion, respectively. The net foreign exchange differences represented an increase of MXN 277 million and decrease of MXN 29 million for the fourth quarter and full year, respectively. As of December 31, 2018, cash and cash equivalents were MXN 5.9 billion, representing 21.5% of the last 12 months’ operating revenues. Volaris registered negative net debt, in fact, a positive net cash position of MXN 2.3 billion. On the refinancing [ph] side, all of our 2019 deliveries have executed leases and after [ph] delivery payments are fully financed for aircraft order until 2022. 2019, we have a continued healthy capacity growth, which contribute to a better CASM result. In the first quarter, we are guiding to have a CASM ex fuel reduction in dollar cents of 4% to 6% year-over-year. In 2019, we also foresee a better performance in the first quarter year-over-year, EBITDAR margin in the range of 16% to 18%, despite Holy Week and Easter week taking place in the second quarter of this year and assuming the current market conditions on foreign exchange rates and fuel prices. During the first quarter, we are expecting to generate operating cash flow. Nevertheless, we will be paying down some of the short-term debt. The company adopted IFRS 16 as of January 1, 2019, using the full retrospective method. The cumulative effect of adopting IFRS 16 will be recognized as an adjustment to the opening balance sheet as an increase in assets and liabilities and an adjustment in the retained earnings. The full disclosure of the main impact on this initial adoption will be included in our 2018 annual report. Now I’ll pass it back to Enrique for closing remarks.

[Enrique Beltranena:]

Thank you very much, Sonia, and thanks for joining the team. I want to finish by thanking our ambassadors and telling our investors that Volaris management and the Board of Directors are committed to continue developing a successful business. Our efforts to improve the top line more prudently in the second half and our cost reduction initiatives moved our costs to a level that offset 2018 fuel price increases, a unique situation in the industry. This performance demonstrates the Volaris team’s ability, when faced with a difficult environment, to actively manage the business and deliver improvements. 2018 will be a year to continue to focus on holding the line and further reducing our costs. We will be committed to finding ways to increase efficiency and drive productivity and to continue raising the bar. We have highly engaged ambassadors and strong cohesive management team with a deep talent bench and distinct winning culture, all of which will certainly drive this company forward and deliver better adjusted ROIC this coming year. Thank you very much for your attention. And operator, we are ready to open the call for questions.

[Operator:]

[Operator Instructions] And we will take our first question from Duane Pfennigwerth [Evercore]. Please go ahead your line is open.

[Duane Pfennigwerth:]

Hi, thanks. Good morning and congrats on the revenue outcome you’re in the fourth quarter. Just on trends into March. It looked like in the fourth quarter, you had maybe more of a bias on load factor, or recovery in load factors is maybe a better way to say it. Do you think we can continue to trend of year-on-year improvement in passenger unit revenue into the March quarter? And should we be thinking about it, continued focus on higher loads?

[Holger Blankenstein:]

Hello Duane. To answer your question, yes, I think the bookings and the fare environment and ancillary revenue environment continued to be favorable. We’re seeing relatively good trends into the March quarter. However, bear in mind that Semana Santa, which is the Holy Week and Easter high season, fall into April. Nevertheless, as we guided, we do believe that the first quarter will continue to see year-over-year key revenue improvement.

[Duane Pfennigwerth:]

Thanks. And Holger, would you care to size that? How would you size that shift, basically losing half of the Holy Week into April?

[Holger Blankenstein:]

Well, despite the seasonality, we believe we’re going to have a positive TRASM year-on-year. It’s a little bit too early to size that precisely, but it’s certainly going to be positive.

[Duane Pfennigwerth:]

Great. And then if you already said this, I apologize for making you repeat it. But did you guide on 2019 nonfuel unit costs in addition to the trend that you expect in the first quarter?

[Sonia Jerez:]

Yes. So the idea is that as we are seeing all the cost initiatives in quarter four and quarter three. In quarter one, we’re going to have the same trend compared with the last year, with this guidance of minus 9% to 6% year-over-year.

[Duane Pfennigwerth:]

And for the full year, could you offer any high-level thoughts? I know a lot depends upon where currencies shake out. But any thoughts on the full year 2019 outlook? And thanks for taking the questions.

[Enrique Beltranena:]

No, Duane. We’re not giving a forecast for the full year yet.

[Duane Pfennigwerth:]

Okay. Thank you.

[Operator:]

We’ll take our next question from Helane Becker [Cowen and Company]. Please go ahead. Your line is open.

[Conor Cunningham:]

Hey guys, this is actually Conor Cunningham on for Helane. Just on the Frontier codeshare, I think you mentioned 4% of your traffic is coming from Frontier at this point. I assume that the load factor impact is about the same as well. Have you been able to distinguish what type of passengers that are helpful with? Is it more VFR or is it leisure vacation oriented customers? And then just a follow-up on that. Is that – I know you talked about deepening that relationship a little bit in 2019, but is there a potential for maybe a JV longer term, just given like where the industry is going as a whole for that. Thanks.

[Enrique Beltranena:]

Thanks for your question. So just to be very precise on the 4% number that we gave, that is the traffic increase of the codeshare just for the month of December. So for the full quarter, it was a little bit lower. We’ve previously said it’s between one and two percentage points [indiscernible] increase in the U.S.-Mexico routes of Volaris. And the type of traffic that we’re seeing, well, precisely, we’re complementing passenger profile, which is traditionally more of a VFR customer, with customers that have to the Mexican beach or a leisure destination, number one. And then we also are seeing some passengers that are flying on certain connecting routes that have more of a VFR profile but are relatively thin routes. So those are the two types of customers that we’re seeing.

[Holger Blankenstein:]

On the third part of your question, our focus today is to make the commercial agreement to work, and we have no plans to go further as of today.

[Conor Cunningham:]

Okay, great. And then just on the routes, like how you guys are growing capacity. So I know, as you mentioned, your – the domestic competitors are being pretty cautious with their growth going forward, and you guys have been much more tactical in recent months. I’m just curious on like how those new routes have been performing. Just given your guidance, I assume that there really hasn’t been much of a drag on unit revenue. But if you could give any guidance to how those have performed recently, that would be great.

[Holger Blankenstein:]

Well, as we typically open routes, we start with very little capacity on those new routes. So as you mentioned, the drag at the start of those new routes is very little on the total [travel] sector of the company. However, we are positively encouraged by the volumes we’ve been generating on those new routes, on those new markets, especially the domestic market. But we’ve – (30

[Conor Cunningham:]

Okay. And just a follow-up on the bus comment. I think you mentioned $38 million of potential – 38 million domestic Mexicans that you think can switch from bus to air. Do you have like the percentage of what you think you can achieve this year? Or do you not think about it that way?

[Holger Blankenstein:]

So 38 million Mexicans have never taken the plane before. Last year, about 1.1 million of those took our flight for the first time, and we believe that we’ll have a similar number in 2019. And bear in mind that the entire bus market in Mexico is over 3 billion passengers. So we continue to see a very, very strong bus market. And we believe we can take away a share of those customers and bring them on to the Volaris airplane.

[Conor Cunningham:]

Great, thank you. Thank you again.

[Operator:]

We’ll take our next question from Stephen Trent [Citigroup]. Please go ahead. Your line is open.

[Stephen Trent:]

Good morning everybody and thanks for taking my questions. Just two from me. The first, what do you think about your 2019 outlook? In a broad sense, to what extent margins go up, down or neutral versus 2018 as a result of IFRS 16?

[Enrique Beltranena:]

Yes, Steve. We’re in the process of doing our whole exercise, as Sonia mentioned on the script. And I would not like to anticipate any further response on that until we finish that and publish the results of it on our formulary interim [ph] by the end of April.

[Stephen Trent:]

Fair enough. And I missed a bit of the first part of the call, so sorry for missing that comment. And just one other question. What do you guys think about long-term capillarity in Mexico City metro area? And any early thoughts regarding what potential you’re seeing to serve the Santa Lucia airport?

[Enrique Beltranena:]

Good. Steve, look, I’ve been very outspoken about this whole situation of the metro airports, okay? We already represent about 10% of departures in Mexico City, 14% our seat share in Mexico City. So we don’t think we are a part of the congestion problem. Nevertheless, we are absolutely sure that we are part of the solution. We want to work with the government in order to try to figure out what the future of the metropolitan traffic is going to be. Having said that, it’s very important to say that there are – two very important conditions for us to keep on working or expanding our capacity in any airport of the entire system of Volaris. The first one is safety, the second one is the financial costs, okay? We don’t know anything about that nor for Santa Lucia, nor for Toluca. And we don’t know exactly when Santa Lucia might be ready. So honestly, we don’t want to speculate on that at this moment, but saying that we’re part of the solution and we’re willing to contribute to the solution.

[Stephen Trent:]

Appreciate it, Enrique. And fair to say as well that versus major network carriers that you guys are certainly less dependent on the Mexico City area capacity.

[Enrique Beltranena:]

Yes, that’s a fact.

[Stephen Trent:]

Terrific. Let me stop there. Thanks very much again.

[Enrique Beltranena:]

Thank you, Steve. Great to hear you.

[Stephen Trent:]

The same. Thank you.

[Operator:]

We’ll take our next question from Michael Linenberg [Deutsche Bank]. Please go ahead. Your line is open.

[Michael Linenberg:]

Hey, good morning everybody. I got two questions here. I guess, Holder, the first, to you, where you talked about some of the capacity moves, both within – by your competition in the domestic market as well as the transborder market, we’ve seen some cutbacks. Can you give us a sense of what competitive capacity looks like maybe March quarter, June quarter, first half 2019 in the domestic market and/or in the U.S.-Mexico transborder market? Do you have any details of that?

[Holger Blankenstein:]

Sure, Mike. I can – I’ll give you a broad sense of what we’ve seen. In the domestic market, the high-cost competitors have publicly stated that what we’re seeing in the systems is that basically, there’s flat growth in the domestic market by those high-cost competitors. And we have been able to put more capacity in, healthy capacity growth, as Enrique mentioned where we up the aircraft utilization in some of our core markets. We’ve been fortifying the core market in Guadalajara and Tijuana and Cancun, putting in new routes but also adding capacity to those core markets. In the international market, especially in Mexico City, we’re seeing a return to normal after the bilateral between U.S. and Mexico opened. We saw a boom in capacity that was put in, especially into Mexico City, which put a lot of pressure in profitability, I think, of the entire market. And we’re seeing that competitors help in decreasing capacity in the first quarter first in the Mexico City [ph] market so that we’ll return to a more normal level of capacity despite the fact that the market continues to grow between 8% and 9%.

[Michael Linenberg:]

Okay, great. Then just one more. And I guess, Holger, this would be for you as well. The 9% to 12% capacity growth both for the March quarter and full year, I know that’s a system number, what does that look like if you were to break out domestic versus international for you?

[Holger Blankenstein:]

So for the first quarter, Michael, the growth in the domestic market is going to be a little bit higher than that and the growth in the market is going to be lower than that, the guidance that we gave you, yes. So that’s basically what we’re seeing right now.

[Michael Linenberg:]

Okay, very good. Thank you.

[Holger Blankenstein:]

Thanks, Michael.

[Operator:]

We’ll take our next question from Ruben Lopez [Santander Investment Securities]. Please go ahead. Your line is open.

[Ruben Lopez:]

Hi, Good morning and congratulations on the results. I have two questions. The first one is on ancillary revenues. We saw an acceleration versus already from growth in both quarters. Can you give us more color on what drove this acceleration in the quarter? Holger mentioned there is still upside, but how much could this represent in 2019 and in the medium term? That’s my first one.

[Holger Blankenstein:]

So in terms of ancillary revenue, effectively, we had exceptional growth in ancillaries. Most of that growth comes from new products and maturing of the products that we put in during 2018 So getting ready to that run rate, for example, the first time that we now charge in the U.S.- Mexico market. Also, we had strong performance on our co-branded credit cards and our membership programs, which is our v.club membership and the v.pass membership programs. We’ve been also – fight smart on the way we price the ancillary. So we’ve been intermitting dynamic pricing strategies, revenue managing some of the ancillaries that we offer. And that has really helped the performance of ancillary in the fourth quarter. And that's a trend that we see continuing in the first quarter. Regarding full potential of ancillary revenues, well, we believe we're not at full potential of ancillary revenues, well, we believe we're not at full potential yet. If we look at our peers in the international market, both in Europe and the U.S., we believe that in the medium to long term, we can get to about 40% of total operating revenues. We're now at 32%. So we continue to see upside. Where is that that upside going to come from? From new products. We still have a list of new products in the pipeline that we're going to implement throughout time and continuously improve our dynamic pricing strategy and revenue management strategies regarding ancillaries. Those will be the two big elements and drivers of that growth.

[Ruben Lopez:]

Okay, very clear. And the second one is just a follow-up. You guys mentioned that the bus market is about 3 billion passengers. But considering distance travel and level of service, what number of passengers do U.S. committed are actually target for us at least. Thank you.

[Holger Blankenstein:]

That’s right. So the 3 billion number is the entire bus market in Mexico, and we believe that after 5.8 hours on the bus, 5.8 to 6 hours, passengers tend to switch or like to switch to air travel if the fares are at the right level. So that market ranges between 100 million and 300 million passengers per year.

[Enrique Beltranena:]

Ruben, let me add to what Holger said. I think it's really important to put in perspective the fact that the total market is 3 billion passengers versus an aviation market in the domestic market, which is today about 45 million to 46 million passengers. We strongly think that this is the driver of our growth, okay? And it is very important – I mean, Holger mentioned it in his script, that about one-third of our growth last year was driven by this. And these are new passengers that we are adding to the pipeline, and it's really creating a differentiated growth for Volaris, which explains why we need to keep on growing the way we're growing.

[Ruben Lopez:]

Great. Thank you Enrique, very clear.

[Enrique Beltranena:]

Thanks Ruben.

[Operator:]

We'll take our next question from [indiscernible], please go ahead your line is open.

[Ricardo Alves:]

Hello gentlemen this is actually Ricardo Alves from Morgan Stanley, two questions. I think the first one maybe, again, Holger, we've been talking for a while now that the network shift – or actually, the new itineraries. So just a quick one on, when do you think we're going to have a full base of comparison? When are we going to be able to see the full effect of this important change that you guys implemented? I know that it's going to be in the second quarter of this year, third quarter. But when do you expect to see the full effect of that? And should we expect even faster unit revenue improvement when that happens? And then my second question, also straightforward. You guys closed the year at 22% EBITDA margin, if I'm not mistaken. With everything that you've done, particularly in the fourth quarter, and with much – I don't know, at least less macro volatility, would you be able to see Volaris delivering high 20s, maybe 30% this year? Just an indication on profitability for this year will be helpful. Appreciate your time. Thank you.

[Holger Blankenstein:]

Well, I'll take the first part of your question regarding the new itinerary. What we've done is in the fourth quarter, we already put in a more productive itinerary and so you'd see some of the effects in the fourth quarter 2018. The first quarter 2019, we'll see a capacity growth between 9% and 12%, and most of that again comes from the new itinerary and the more productive utilization of our fleet. And then the full effect of this itinerary change will come in the second, third and fourth quarter of this year, where you'll see continuous improvement in the productivity of our fleet. I'll pass it on to Enrique on the profitability.

[Enrique Beltranena:]

Yes. I think the company – it's important to say, that EBIT-wise, the company has never made money in the first quarter, okay? That's the improvement of every driver. I mean, TRASM, load factor, ancillary revenues, reduction on CASM, everything is going to be shown continuing the same trend that we had during the last year. I think it's very important to say that I consider the growth or the ramp-up of the TRASM in the sequential way that happened last year and a very important ramp-up, okay? I think going up in 28% for the first quarter to the fourth quarter it's a very important move, okay? I also think that it is very important to consider that the new itinerary, it's not only pushing in a lot of ASMs with better usage and better productivity of the fleet, but also, it's going to push down the CASM in an important way.

[Ricardo Alves:]

Thank you very much. And Enrique thanks, Holger as well.

[Holger Blankenstein:]

Welcome.

[Operator:]

We will take our next question from Mauricio Martinez. Please go ahead your line is open.

[Mauricio Martinez:]

Hey good morning everyone, thank you for taking my question. My first question is on rent. Despite the new aircraft received in the quarter, you registered practically flat rent. So I was wondering if there has been any change in that bracket or what is the main driver of such good performance there.

[Enrique Beltranena:]

I would say it's clearly – the reason behind that is the new leases are coming in a great selling lease] rate factor, and that has been the case.

[Holger Blankenstein:]

So on the loyalty side, clearly, we announced that we are working on a loyalty program. That is something we continue to do. We're developing the framework, and we should be launching that in the future. We don't have a specific date on that yet.

[Mauricio Martinez:]

Great. And just my last question, if I may, I just wanted to double-check if you guided some EBITDA margin for the first quarter.

[Sonia Jerez:]

Yes, indeed. So the guidance we have for the first quarter in terms of EBITDA margin, as I mentioned in the presentation, it was between 16% to 18% range, despite – as Holger explained, despite that the Holy Week and Easter Week is taking place in April instead of March.

[Mauricio Martinez:]

Okay, perfect. Thank you very much and congrats on the results.

[Sonia Jerez:]

Thank you. Bye, bye.

[Operator:]

And there are no further questions on the line at this time. I will turn the call to our speakers.

[Enrique Beltranena:]

So thank you very much, ladies and gentlemen. I would like to really appreciate that you continue following us and your support to the Volaris business plan. Thanks for joining us today, and we are over with this call. Thank you very much.