Controladora Vuela Compañía de Aviación, S.A.B. de C.V.
Q4 2017 Earnings Call Transcript

Published: 23 Feb 2018

[Operator:]

Good morning, everyone. Thank you for standing by and welcome to Volaris' Fourth Quarter 2017 Financial Results Conference Call. [Operator Instructions]. At this point, I would now like to turn the call over to Mr. Andres Pliego, Volaris' Financial Planning and Investor Relations Director. Please go ahead, sir.

[Andrés Pliego:]

Good morning, everyone, and thank you for joining the call. With me today we have our CEO, Enrique Beltranena and our EVP, Fernando Suarez and Holger Blankenstein. They will be discussing the company's fourth quarter 2017 results announced yesterday. Afterwards, we will move on to your questions. Please note that this call is for investors and analyst only. Any questions from the media will be taken on an individual basis. Before we begin, please let me remind everyone that some of the statements we will make on this call would constitute forward-looking statements within the meaning of applicable securities laws. Forward-looking statements are subject to several factors that could cause company's actual results to differ materially from expectations for reasons described in 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 is now my pleasure to turn the call over to our CEO, Enrique Beltranena.

[Enrique Beltranena:]

Thank you, Andres. Good morning to everybody and thank you all for being with us today. Throughout 2017, Volaris faced a very challenging year with factors ranging from geopolitical and macro events like FX and fuel price pressure to softer demand environment in a transborder market. However in the past year, we continue to focus on achieving key milestones to build the foundations for a long-term success. The Mexican air travel market is changing with new customers flying for the first time more top point to point connectivity and such market has evolved to an environment where LCCs have more than half of the share of the market. During the past decade, domestic market grew from 20 million passengers to 44 million passengers, and Volaris was the driving force of about half of this market change. Volaris has developed a diversified network with little concentration in Mexico City, which is already constrained today and will remain so at least until 2022. We are fully dedicated to maintain the cost structure. The qualities and the long-term strategy to drive profitability growth in its markets. We are absolutely committed to be one of the lowest unit cost operators in Mexico and Americas, which enables us to offer the most competitive fares in the market. Let me give you some examples of what we achieved in 2017 to build a solid future for our business. First, we recently created a new fare category called the preferential fare that happening November a new completely unbundle fare which is our tool to provide a market, the lowest fares to stimulate demand. With these new fare, we will look to further stimulate demand, specifically in our core markets - the one and Guadalajara where our bus switching strategy has been very successful. We continue to expand our ancillary revenues. Our non-ticket revenues increased 23% in the year and non-ticket revenue per passenger reached the record of MXN446 for the fourth quarter, 28% of our total revenues for the year come from the non-ticket revenue line positioning the company among the best-in-class and by far the highest in Mexico. We are on track to reach a third of the revenues milestone as early as this first quarter of the year. We continue to see growth in ancillary revenue from our first checked bag by promoting our discounted fares from our international and more recently our domestic markets. We are now charging $25 and $35 in the international first checked bag. Our low fare cloud named Bcloud now has more than 730,000 subscribers which generates a steady monthly membership revenue and it is a vehicle to push our revenues and creates repetitive customers. More recently, we launched vpass, our new subscription service that will increase repeat business and customer's travel frequency. Furthermore, we launched a third co-branded credit card with no annual fees, aimed to a broader segment of middle class and our VFR base. Today, we have combined in the three programs more than 200,000 credit card holders. Lastly, we're still expanding our a la carte portfolio, through our travel merchandising approach, adding transfer services and SMS and dedications among others. Dynamic packaging continues to perform well, generating additional revenues and doing it directly enhancing miles. We continue working on diversifying the network with a major focus on point to point routes. In 2017, based on our services, over 1 million of our customers were flying for the first time and about 2 million of our customers consider first taking the bus before flying but they ended up flying with Volaris. This demonstrates that there is an important opportunity for Volaris to continue bus switching regardless of the organic passenger market growth cycle. We still have an important opportunity in the years ahead to ensure the success of the bus switching program in our VFR market. Another important milestone was the Codeshare agreement that we signed with Frontier Airlines. It is the world's first Codeshare agreement between two low cost carriers. Volaris' customers will access - will gain access to new cities in the U.S., beyond our current destinations and Frontier customers will gain first-time access to new destinations to more than 20 points in Mexico on the Volaris network. We estimate that our partnership would initially add around 20 new destinations to our network. And 80 new routes between both Mexico and the U.S. The Codeshare agreement greatly - it enhances the potential for connecting itineraries through lower fares and improves our distribution channels. This will add incremental load factor to our existing international network. We expect subject to obtaining regulatory approvals to start operating the Codeshare during the summer. On the Central American front, we obtained a foreign air carrier permit in the U.S. for our Costa Rica certificate of operation. Volaris is well on their way to replicate its ultra-low-cost model in Central America by offering low base fares at point to point service in the region and in the U.S. A market that represents 65% of the seats installed in the Central American flying market, and it is a natural extension of our USB of our core market to an overprice market segment. We have initiated sales of four routes from Central America from Los Angeles, JFK and Washington, D.C. and we are already seeing a very positive demand from the market. Our first flight from Central America to Los Angeles starts now on March 16. The fixed part is that on the fleet side, adding to the currently delivery schedule of 39 aircraft to arrive between 2018 and 2021, we signed a follow-on order to purchase 80 Airbus A320NEO family aircraft to be delivered from 2022 to 2026. This negotiation represent a very aggressive fleet price reduction which also applies to our current backlog. This follow-on orders will replace at least 50% of our actual fleet by 2026 providing rational and healthy growth to the market. The new arrivals incorporates on top of the fleet price reduction and aircraft that produces 18% reduction on fuel burn, our actually neos are producing that level of fuel burn. If we pro forma the equivalent of 18% fuel burn reduction on our 2017 fuel expense, it equals to MXN1.3 billion or 5% touch points of our operating margin. This is a fundamental strategy for lowering cost with the most fuel-efficient and environmentally friendly fleet for which we have the right financing strategy already in place. It demonstrates the confidence in our ultra-low-cost business model and in the long-term growth, we anticipate for the region. Expanding on cost control, Volaris is fully equipped and focused on a long-term model of continued progress. In the last six months, we have reduced our cost per available seat mile ex-fuel 5 percentage points compared to the first half of the year, resulting in $0.47 in the last quarter. This ratifies the company among the five lowest unit cost operators in the world. I'm not satisfied yet. In 2018, we have more than 100 initiatives representing more than MXN1 billion of operating expenses to further reduce our unit costs. The company is committed to be at $0.45 CASM ex-fuel or lower by the end of the summer. Volaris's domestic unit cost is one of the lowest in the market. Our adjusted EBITDAR margin of 28% for the quarter was in line with our recently increased stated guidance. Reflecting a 2% operating margin for the quarter and a positive operating result for the year. Despite the net loss for the year, Volaris generated MXN1 billion in operating cash. Let me give you some color for the first quarter and our current outlook for 2018. In Mexico, the market environment has changed to the extent that low-cost carriers have democratized air travel and now represent more than half of the market. As a result, visiting friends and relative traffic seasonality is much more pronounced. During January, we saw unbalanced load factors between the northbound and southbound international segments partially offset by our drive to strengthen the base fare. However, after the high season finished, we've been pushing for volume. In the visiting friends and relative low season during February and March, we're stimulating load factors in both domestic and international driven by our low preferential fares and demand stimulation from our bus switching core markets. Nevertheless, we continue seeing softness in the international major transporter visiting friends and relatives main series. This is to a degree normal in certain markets, given short-term excess capacity resulting from the flexing of bilateral agreement. We are already seeing competitors adjust capacity in those markets going forward. Because of the aircraft production delays from our aircraft and engine manufacturers, and despite an increase in aircraft utilization, we're lowering ASM growth guidance for the year to a range of 9% to 12%, balancing in an effective way our domestic and international mix depending on the seasonality. Specifically for the first quarter, we're growing capacity at approximately 10% in both domestic and international market. But watch out, this represent 7 percentage points below last year's first quarter. In general, we feel more constructive on the demand environment in both domestic and international markets. This is reflected in increased loads for the upcoming ones. One last thing before passing it on to Fernando. Given that we have become the largest player in the domestic market and our important inroads with a weak log and the co-branded credit card that I just mentioned. It now make sense for us to consider developing a frequent flyer program, such programs can allow substantial long-term value, and we will share our progress on the project throughout the year. Now, let me hand it over to Fernando to elaborate on the financial performance for the quarter. And further detail on our guidance. Please, Fernando.

[Fernando Suárez:]

Thank you very much, Enrique. I'll be reviewing our results for the figures filed with the SEC and BMV. Total operating revenues were MXN6.6 billion for the fourth quarter, an increase of 2.4% year-over-year. Non-ticket revenues now represent 28% of total operating revenues increasing 3 percentage points year-over-year partially compensating the base fare decline. Non-ticket revenues were MXN1.9 billion for the fourth quarter, an increase of 17.4% year-over-year. Non-ticket revenues per passenger were at a record of MXN446 for the fourth quarter, increasing 10.2% year-over-year. TRASM decreased 6% year-over-year to MXN1.35 cents for the fourth quarter. During 2017, U.S. dollar-denominated collection was 40% partially helping us to insulate the company from exchange rate pressures and reflecting the company's effort to have a natural hedge from a diversified network. This growing trend in our collection substantially closes a gap on any FX mismatch and brings us closer to be FX-neutral. Moving onto costs. CASM decreased 0.4% year-over-year to MXN1.33 for the fourth quarter despite an average economic fuel cost per gallon increasing 22% year-over-year, substantially offset by our fuel hedging program. CASM ex-fuel decreased 1% year-over-year to MXN92.7 cents for the fourth quarter. The total average economic fuel cost per gallon in the fourth quarter was $1.87, which includes a net economic benefit of MXN103 million from our call options exercised in this period. Our fuel risk management program paid off in the quarter with jet fuel hovering $1.75 from October all throughout late December and considering an average strike price from our Asian call options at $1.48 per gallon for the fourth quarter. Looking at the first quarter of this year. We have existing call options for approximately 60% of the expected jet fuel consumption at an average price of $1.63 per gallon. We have also hedged approximately 55% of calendar 2018 at an average price of $1.74 per gallon. From the fleet perspective, we have 5 new A320NEOs deliveries during 2017, 3 of which were for fleet replacement and two incremental, ending with 71 aircraft. At the end of the fourth quarter, Volaris's fleet had an average of 181 seats per aircraft and 66% of the seats were in Sharklet-equipped aircraft, on track to continue upgauging and improving fuel burn in our fleet. Adjusted EBITDAR in the fourth quarter was MXN1.9 billion, in line with our revised increased guidance, adjusted EBITDAR margin was 28%. Operating income was MXN118 million for the quarter, representing a 2% operating margin. The FX depreciation at the end of the fourth quarter led us to an FX gain of MXN784 million below the operating line. Net income for the quarter was MXN555 million with a net margin of 8.4%. The earnings-per-Series A shares was MXN0.55 and $0.28 per ADS. Cash flow generation from operating activities for the quarter and for the full year was MXN1.1 billion and MXN986 million respectively. In conjunction with cash flow used in investing activities of MXN852 million and net cash flow provided by financing activities of MXN865 million as well as a positive net effects of MXN448 million from our high mix of unrestricted cash in U.S. dollars, net cash generation in the fourth quarter was MXN1.6 billion. Our balance sheet is strong, healthy, liquid and intentionally very dollarized. We are also comfortable with our financing profile and our adjusted leverage is conservative at below 5x. As of December 31, Volaris had MXN7 billion in unrestricted cash, representing 28% of the last 12 months operating revenues. We maintained a negative net debt or a net cash position of MXN3.5 billion. On the fleet financing side, we have all of our deliveries on to the first half of 2019, with executed leases. And all of our predelivery payments fully financed for aircraft deliveries until 2021. Regarding profitability guidance, we expect to achieve an adjusted EBITDAR margin in the high-teens for the first quarter of 2018. Assuming current spot exchange rate and jet fuel prices and hedging in place. Our aircraft and engine rental expense for the first quarter is expected to be in the order of $87 million. This results in an operating margin year-over-year improvement for the first quarter of 2018, with an underlying CASM reduction. Now, I'll pass it over to Enrique for closing remarks.

[Enrique Beltranena:]

Thank you, Fernando. In summary, let me start, that Volaris is the largest driver of the growth of the Mexican market during the last 10 years. Volaris is now the largest operator in the domestic market and will continue stimulating demand and converting bus travelers especially in our core markets Tijuana and Guadalajara. Volaris is committed to become one of the best-in-class ancillary revenue generators in the world. Volaris has and will continue working on a diversifying network that committed on growth with discipline capacity management. The Codeshare agreement greatly enhances the potential for international traffic, a low factor growth. Costa Rican certificate of operation is the ultra-low-cost model designed to capture the Central America international traffic to the U.S. The aircraft follow-on order is a driver for this company to become the long-term winner in low-cost and be within the top three lowest cost operators of the world. We are committed to be one of the lowest unit cost operators in Americas and we want to finish thanking our ambassadors and telling our ambassadors that despite the geopolitical conditions, Volaris management and the Board of Directors are fully committed to continue being successful in this business and always be the lowest cost unit operator in the market. Thank you for your attention. Operator, we are ready to open the call for questions.

[Operator:]

[Operator Instructions]. And your first question comes from Michael Linenberg with Deutsche Bank.

[Michael Linenberg:]

I just have, I have a couple of questions here. Enrique, on your commentary about March quarter, you mentioned that some of the markets you felt a bit more constructive with respect to the fact that you were seeing better loads. And I know you did mention that you were shifting your strategy during the off-peak period and going after volume, arguably at the expense of pricing or yield. When we think about the off-peak periods with the higher loads, will those loads be sufficiently high that when you incorporate the impact of the lower yield that unit revenue will be positive in the March quarter or where is unit revenues trending, based on what you're seeing right now?

[Enrique Beltranena:]

Okay. So Michael the - let me explain a little bit of what I'm trying to say. What I clearly see is the market has totally changed. Okay.

[Michael Linenberg:]

Okay.

[Enrique Beltranena:]

And has changed, Michael in the fact that now Mexico's market has more than 50% of ultra-low-cost carrier share in the market. So a lot of the growth in the last years has been driven by ultra low-cost carrier kind of traffic. Visiting friends and relative traffic. That makes the traffic itself in Mexico to be much more pronounced on a per season basis. So what happens is, you have to manage the market very differently when it is high season versus what it is low season now. And the pronunciation of that impacts the market. So what happens is, you get into the high season and are able to yield and the yield goes up and you manage yields and ancillary in a very effective way and you produce a lot of profits during the high seasons. But in the low season comps and since the amount of the share of the visiting friends and relatives traffic is by far higher and we are seeing some depression in the way they are behaving because of the relationship with the U.S. specifically, we have to change completely them all and we have completely change the way we manage the season. And be much more focused on producing the load factors. You will see extremely higher load factors versus a year ago in the first quarter, but yes, in a cost of the base fare yield, somehow compensated with the ancillary revenues which because of the volume are generating much more ancillaries than where we used to be.

[Michael Linenberg:]

That's very helpful. My second question is to Fernando. Fernando, you highlighted the fact that, now your collection in dollars is 40% of revenue and how you were really closing the FX gap, what percent now are we, when we think about dollar cost for Volaris. Where are you? Are you 55%, 60% maybe it's lower than that?

[Fernando Suárez:]

It's at around 60%, 65% depending on the quarter. Michael. But, as we stressed in the call, we're getting closer and closer to being FX-neutral to the degree that we continue diversifying the network that we continue to grow international operations not only the U.S. but now more recently Central America. We're getting closer and closing that gap on the FX mismatch side.

[Michael Linenberg:]

And I see just that--

[Enrique Beltranena:]

Michael, let me explain you a little bit further on that. What Fernando is saying it's - I mean, obviously this is not the mathematical equation where you try to offset U.S. dollar revenues with U.S. dollar cost. There is also something in the middle of it, which is profitability of the domestic network. And so what's happening is once you get to 40%, 44% of U.S. dollar revenues, our domestic profitability routes are by far more profitable than a conversion of those routes into a U.S. dollar base. So we will never get into a clear mathematical match, but we will get to a better profitability, which is by far what we are trying to get at the end of the equation.

[Michael Linenberg:]

Okay, now that's very helpful. And then I would just add, just confirm. All of your Central American fares are either pegged to the U.S. dollar or priced in U.S. dollars, is that right? Fares you saw in Guatemala or Costa Rica.

[Enrique Beltranena:]

That's right, everything we are doing in Costa Rica is U.S. dollar fare.

[Michael Linenberg:]

Okay. What about the other - what about El Salvador. And then El Salvador?

[Enrique Beltranena:]

El Salvador operates in a U.S. dollar currency.

[Michael Linenberg:]

That's what I thought. Thanks for the very comprehensive answers, gentlemen.

[Operator:]

And your next question comes from Helane Becker with Cowen.

[Helane Becker:]

Okay, I don't know if I'm going to able to ask smart questions, but I going to try. Do you have the quarterly aircraft delivery schedule, so that we can think about how to model in rent and capacity growth?

[Fernando Suárez:]

Helane, we have for calendar 2018, 12 growth deliveries and four re-deliveries. However, with recent developments on industrial delays and constraints from our aircraft and engine manufacturers, some of those aircraft might be pushed off to next year. That results in us decreasing our ASM guidance, down to 9% to 12%. So we'll get back to you on the specific aircraft count, but we expect anywhere between two shelfs to four shelfs, to maybe slip into next year, but we'll see if we make that up primarily via utilization.

[Helane Becker:]

Great. And then could you - on the redeliveries, can you extend any of those leases by far seven months to accommodate the schedule. If there are - if these either two shelfs to four shelfs don't deliver in time?

[Fernando Suárez:]

We can extend some of them, actually we are extending specifically two at this moment in the first half, and a potentially a third one in the third quarter that helps us offset part of the delays on the fleet side.

[Helane Becker:]

Okay. And my other question is with respect to bookings going into Holy Week, right, because I feel like Easter, this year comes into March, and that's a busy market for you, right, a busy time for you. So based on the comments that Enrique made with respect to the increase in seasonality with the VFR traffic. Should we be thinking that way, that first quarter exceeds second quarter this year or second quarter - I mean what are your - I mean, may be bottom line that's what your bookings looking like?

[Holger Blankenstein:]

Helane, this is Holger. Good morning.

[Helane Becker:]

Hi, Holger.

[Holger Blankenstein:]

Yes, we have the first part of Holy Week and Easter Week in the first quarter, which just touches the last couple of days of March. And we are seeing strong volumes for that season, that's typically one of the high seasons in the year. But please remember that, only partially the Holy Week touches the first quarter. With our low fares that we have been putting into the market, we have been able to stimulate demand both in February and March, and specifically in the Easter high season.

[Helane Becker:]

And is that continuing into April or are you thinking about starting to inch fares higher in April?

[Holger Blankenstein:]

Well, in high seasons, we typically see higher fares. So you will see the second part of the Easter Holy Week high season in April and we should be able to have good yields and good volumes in those two weeks.

[Operator:]

And your next question comes from Duane Pfennigwerth with Evercore IFI.

[Duane Pfennigwerth:]

I think most of the intelligent questions have already been asked, but we'll give it a shot. Just with respect to Costa Rica, can you speak to the amount of gate availability, infrastructure availability that you have there. How large do you envision that operation being 3-5 years down the road, relative to what you have today?

[Enrique Beltranena:]

That's also very intelligent question. What we - how we see Costa Rica, Duane is - is an operation that keeps on growing, specifically in the U.S. There is - when you analyze the Central American market as I explained is, today based on the ASMs installed in that market, it's about 65% of ASMs are between Central America and the U.S. That's why for us it was, A, very important to have a certificate of operation in Costa Rica. That justifies itself. B, the Intra Central American operation gives us 5th and 6 freedoms. And those 5th and 6 freedoms allows us not only to fly from Costa Rica, but from the other countries connecting from Costa Rica into the U.S. In terms of capacity of - total capacity to be installed in the 3 to 4 plan - year plan for the region, we are talking about 18 aircraft to 22 aircraft, which we will be modulating in terms of capacity as we progress in the opening of the routes and we can maintain usage of aircraft with utilizations above 13 hours per day.

[Operator:]

And your next question comes from Mauricio Martinez with GBM.

[Mauricio Vallejo:]

My question is regarding the competitive environment in Mexico in domestic traffic. We've seen pressure and yields for quite a whole year. So your thoughts would be very appreciative on this front, what are you seeing for 2018 and if you've seen any change in the competitor's - I mean actions - how about you looking first?

[Fernando Suárez:]

So Mauricio, so as Enrique already highlighted, there are some structural changes going on in the domestic market. We now have more than 50% of the seats offered by ultra-low-cost carriers. So that, in general, reduces the price environment in the long-term. We continue to see that the ultra-low-cost carriers are able to stimulate demand with very low fares, especially in the low seasons. And mostly in the larger airports, demand remains relatively strong in the domestic market. There are some exceptions to the lower fare environment in general, such as Mexico City, which is a slot restrained airport, so we've seen very stable pricing environment in Mexico City, and some of the niche Volaris markets, the smaller markets domestically. I want to underline that Volaris will continue to be the low-fare leader and continue to drive volume as per our ultra-low-cost model. So we are the drivers of the low fares in the market, which is very much in line with what we want to achieve, people that previously used the buses, we are able to convert them with these lower fares to our airplanes and we make up some of the base fare difference - reduction in base fare that we've seen through growing ancillaries. We've been very successful in generating more ancillaries by selling people optional products and services after they buy the low, low base fares.

[Operator:]

And your next question comes from Rogerio Araujo with UBS.

[Rogério Araújo:]

I have a couple of questions. The first one, sorry, if already mentioned, some of those points, I think you already had. Just to wrap-up, do you expect TRASM to continue improving marginally in the first quarter of '18 and forward. Is there any margin guidance for 2018 and can we see further market depreciation in the beginning of the year before it gets better or not. So just to wrap-up your expectation in terms of TRASM improvement, the timing, the magnitude and if there is any margin guidance? This is the first question, thank you.

[Enrique Beltranena:]

So the company has never provided a guidance on TRASM and we are not doing it at this moment. Saying that, it is important to say that we are expecting some little deterioration on TRASM in the first quarter. But we're expecting as the high seasons grew more and with the share of the visiting friends and relatives traffic in the market now, the TRASM should have a much better peak during high seasons. And that's what we are expecting.

[Fernando Suárez:]

And adding on to Enrique on guidance, specifically for profitability guidance for the full year, we're not in a position to give that nor do we customarily give that. But for first quarter and specific, what we are guiding to is an adjusted EBITDAR margin in the high-teens for the first quarter, assuming current spot in exchange rate prices and the hedges by the way are in the money. And we're also guiding an aircraft and engine rental expense in the first quarter to be in and around $87 million. With these environment, we expect to result in an operating margin increase year-over-year in the first quarter. That's what we can say on profitability guidance.

[Rogério Araújo:]

Just a follow-up here, can we look at your traffic data for January and see a prioritization of yields instead of volume growth. So in addition to your goals for the first quarter, can you think about some kind of ASM growth expected. Is it in decreasing versus Volaris previous expectation or not? So how can you look at these January traffic data?

[Fernando Suárez:]

So Rogerio, January has a very important high season component. And what we do in high-season is we prioritize yields and maybe to a lesser extent volume in the lower season February and March. What we typically do as an ultra-low-cost carrier is that we prioritize load. We are very load factor active. So what you will see is a significant volume for February and March. And then as we move into the high season in Easter and Holy Week, we are going to focus on generating the yields to generate profitability during the high season. And as Enrique mentioned, we currently see a much more pronounced difference between high and low season in the market.

[Rogério Araújo:]

So last question is we - it pop up some news saying that one of your major shareholders converted their B shares into A shares. Any thought on how could this change your board member's structure - your shareholder structure, if there is any potential change to that in your review?

[Fernando Suárez:]

The B share conversion into A share conversion should not affect this. And to the best of our knowledge, there are no changes expected in the board composition.

[Operator:]

And your next question comes from Stephen Trent with Citi.

[Stephen Trent:]

Most of my questions have been answered. I just have actually one follow-up. When I think about the last year or so, the northbound traffic for you guys has been, seems to be the - has been the Achilles Heel, and how do you think that this likely improves with your Codeshare with Frontier. Just wondered, if you could give us a little more color on how that alliance might beef up that corridor?

[Holger Blankenstein:]

Stephen, yes. The Codeshare with Frontier is definitely one driver to improve our U.S. traffic and what I can tell you about what we see with the Codeshare is that we expect our network to add around 20 new destinations in the U.S. operated by Frontier. Some of the interesting markets are DFR niches that are too small for us to service directly, like Salt Lake City and Minneapolis for example. In terms of our passengers that we see from the partnership, as we achieve full potential, full maturity, we expect it to be in the range of 1% to 2% of our annual traffic of the total annual traffic that we have. This will be around 2% to 3% of our U.S. traffic. One important thing with this agreement is that it also includes the possibility, not only to sell connecting flights but also to have Frontier act as a point of sale of Volaris flights in the U.S. So we effectively add a sales channel, a point of sale via Frontier for our flights to Mexico and in the future also to Central America. So it has those two components, more connecting traffic and also a point of sale through the Frontier distribution channels for our flights - transporter flights. So we are very optimistic about this Codeshare with Frontier.

[Stephen Trent:]

And on a related subject, where several months in or so with this relaxed regulations between the U.S. and Mexico on aviation regulation test. As a result of that, have you guys seen any competition adjustments on those international routes you serve. So at least from U.S. carriers into Mexico, has it really moved the needle for you guys on those international routes or are you seeing competition kind of roughly where it was before?

[Holger Blankenstein:]

Well, Stephen, what we have seen is - there has been an increase in capacity from U.S. carriers to the beach markets, servicing U.S. originated leisure traffic to the Mexican leisure destinations on the one hand. On the other hand, we've seen capacity increases to Mexico City from the large U.S. metropolitan areas and we do observe a short-term excess in capacity in those large U.S. metropolitan markets to Mexico City, which we see some adjustments in the near-term future, but we believe that there is still some adjusting that needs to be done in those large U.S. markets to Mexico City, specifically. That is a direct result of the flexing of the bilateral agreements.

[Operator:]

And your next question comes from Josh Milberg with Morgan Stanley.

[Joshua Milberg:]

Just a couple quick ones. The first is that I just wanted to confirm that the MXN78 million that was recognized in your other operating income line, this quarter all sale leaseback gains. And also related to that, we're just hoping you guys could update us on what the outlook is in 2018 for sale leaseback gains. I know that that's something that's tied to how many aircraft you take off your own order book.

[Fernando Suárez:]

Josh, regarding the MXN78 million that you see in other operating income, we did not have any sale leasebacks in - we do not have any in the first quarter of this year expected. We did have one in the fourth quarter of last year. And in calendar 2018, what we have on schedule is four sale leasebacks out of our order book. Now that might slip - some of them might slip into 2018, depending on the industrial delays that might slip into 2019. I'm sorry, but we'll see if the manufacturer closes the gap. And see all of the 4 or 3 out of 4 still happen this year.

[Joshua Milberg:]

But you said that none of those four expected in the first quarter and therefore not incorporated in that EBITDA margin guidance you provided.

[Fernando Suárez:]

No, we did have an spare engine scheduled for the first quarter that is slipping into the second quarter. So first quarter, you should not see any gains on sale leasebacks on aircraft nor on spare engines.

[Joshua Milberg:]

And then my second question is if you could just elaborate a little bit further on your initiatives to reduce costs and also on the [indiscernible] shaved your cost competitiveness versus Viva. Obviously Viva is the player that's been pushing hardest on the growth front today and I know they operate with a somewhat higher seat density and also are more focused on the domestic market. So I think the cost figures that we see aren't entirely apples-to-apples but if you could provide a little perspective there that would be helpful. And also I just like to understand, you know in some measure, maybe you're moving in their direction and in terms of how they operate in the market.

[Fernando Suárez:]

Josh, on the cost initiatives, as stated by Enrique, we have over 100 of initiatives that we expect to achieve savings over MXN1 billion in savings for calendar 2018. There are wide variety of initiatives across the board companywide, obviously many of them are coming from the fleet side and our fleet cost. We've done important inroads in reducing the fleet cost with follow-on order, also I've mentioned not only did we aggressively negotiate the price on the 2020 to 2026 deliveries. But we are also repricing the backlog that - that's a benefit in the cost as early as this year in the backlog deliveries that we already have in place. So that obviously is an important driver on that. And in terms of cost comparison, it's important to bear in mind that we already have a third of our operation into the international and specifically into the U.S., in which airport costs are substantially higher to operate than your average Mexican airport and that's a very important piece of the cost. If you were to strip that out or control for that or just to look at domestic unit costs, it's pretty much a apples-to-apples comparison.

[Joshua Milberg:]

Meaning that you guys are pretty much at the same level?

[Fernando Suárez:]

Correct.

[Operator:]

And there appears to be no further questions at this time. I would like to turn the floor back over to Mr. Enrique Beltranena for any closing remarks.

[Enrique Beltranena:]

Well, thank you very much to everybody. I think this conference is now over. And I would like to again thank you the Volaris ambassadors for all their efforts in this last quarter and for the entire year of 2017. Thank you very much for your confidence and we'll keep on doing what we're doing which we think it's in the right track.

[Operator:]

And that concludes today's conference call. You may now disconnect.