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Controladora Vuela Compañía de Aviación, S.A.B. de C.V. (VLRS)

Q1 2024 Earnings Call· Tue, Apr 23, 2024

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Transcript

Operator

Operator

Good morning, everyone. Thank you for standing by. Welcome to the Volaris First Quarter 2024 Financial Results Conference Call. All lines are in a listen-only mode. Following the company's presentation, we will open the call for your questions. Please note that we are recording this event. This event is also being broadcast via live webcast and can be accessed through the Volaris website. At this point, I would like to turn the call over to Ricardo Martinez, Investor Relations Director. Please go ahead, Ricardo.

Ricardo Martinez

Management

Good morning, and thank you for joining the call. With us is our President and CEO, Enrique Beltranena; our Airline Executive Vice President, Holger Blankenstein and our Chief Financial Officer, Jaime Pous. They will be discussing the company's first quarter 2024 results. Afterwards, we will move on to your questions. Please note that, this call is for investors and analysts only. Before we begin, please remember 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 results to differ materially from expectations as described in the company's filings with the United States' SEC and the Mexico CMDV. These statements speak only as of the date they are made and Volaris undertakes no obligation to update or modify any forward-looking statements. As in our earnings press release, our numbers are in U.S. dollars, compared to the first quarter of 2023 unless otherwise noted. With that, I will turn the call over to Enrique.

Enrique Javier Beltranena Mejicano

Management

Good morning, everyone and thank you for joining us today. I am proud to start by saying our Volaris team delivered strong first quarter results. It was certainly a challenging quarter, as we ramped up the engine accelerated inspection processes that drove challenges in delivering a good schedule, but I'm proud that, the team was able to execute on our plans so well. Over the last six months, our primary focus has been directing operations to enhance our customer service, managing ongoing changes to the schedule, as the fleet plan changes and continuing our emphasis on obsessive cost control. Despite the ongoing challenges with engine and aircraft issues, we continue to execute well and remain focused on delivering shareholder value. During the first quarter, we undertook preventive accelerating inspections, resulting in the grounding of approximately 60 engines, for which we received pre-arranged compensation from Pratt & Whitney. We'll continue to look for ways to mitigate the impact of these engine removals and we'll continue to work closely with Pratt to accelerate the required work on the new engines. However, despite Pratt & Whitney's optimistic discuss on enhancing MRO capacity and availability of materials and spare parts, Volaris remains skeptical about tangible progress in these areas. While engine removals to-date have gone accordingly to schedule, an aircraft on ground during the quarter were consistent with the plan, we are being conservative in our expectations for when engines will return into service. Even with all this complexity, we have been able to drive strong results through nimble planning, a flexible network and our ability to make rapid strategic adjustments, we generated a strong increase in TRASM and ancillaries while cost remained controlled. As a result, we achieved net profitability in the first quarter, posting a $33 million net income. This marks a…

Holger Blankenstein

Management

Thank you, and good morning. In the first quarter, Volaris experienced robust demand, especially in the domestic market, with March showing significant outperformance. Although, we expected some traffic shift from the second quarter, given that Easter occurred in the final week of March, we are also happy with last-minute bookings. Our capacity reduction was less-than-expected at around minus 13% instead of the guided minus 16% to minus 18%. This was because Airbus delivered two new A321 neos earlier-than-planned. Additionally, high aircraft utilization also boosted ASMs per departure for the quarter. This additional capacity enabled us to meet demand and dilute fixed costs. Regarding network breakdown, ASMs were 27% lower in the domestic market and we increased capacity by 17% in the international market, resulting in a network-wide ASM decline of minus 13%. Taking advantage of the restoration of FAA Category 1, we continue to reallocate capacity to northbound routes, which are undergoing a maturity process in preparation for the peak summer season, while simultaneously rightsizing our domestic core markets. Therefore, the international load factor dropped four points to 82% and the domestic markets load factor was strong at 91%, up six points over the prior year period for a healthy load factor result of 87% for the overall network. During the remainder of 2024, we will be cautious and will not introduce too much capacity to any individual route. While the earlier-than-expected arrival of the two A321 neos provides incremental ASMs for the full year, we still expect a capacity reduction of 16% to 18% for 2024 and we are trending toward the upper end of that range. We are closer to minus 16% change versus 2023. Meanwhile, we continue to redeploy significant capacity into the U.S. market and we expect it will constitute around 45% of our network this…

Jaime Esteban Pous Fernandez

Management

Thank you, Holger. Positive TRASM trends and strict cost control define our first quarter 2024 financial results. When combined with solid traffic, Pratt & Whitney compensation and diligent execution, we generated net profitability in the quarter. This is a notable accomplishment for the first quarter, as historically first quarters due to seasonality have resulted in net loss. This first quarter results encourage us to revise upward our full-year 2024 guidance. However, our execution plan for the year remains aligned with our initial outlook. I will provide a more detailed discussion of our updated guidance shortly. Let me start by walking through our performance in the first quarter of 2024, compared to the same period last year. Total operating revenues were $768 million, a 5% increase notwithstanding the 13% year-over-year reduction in capacity, due to the strong demand and total revenue per packs improvement. CASM-ex fuel result came in better than guidance at $0.0516 an increase of 11% against the first quarter of last year. The improvement was driven by the remeasurement of previously-booked redelivery accruals, which reflect nine lease extensions for aircraft for yearly due for delivery in 2025 and 2026. Nonetheless, as discussed in our previous call, there was substantial cost pressure from the engine-related AOEs and the effect of a larger proportion of international capacity, particularly with higher landing and navigation fees in the United States. We booked sale on leaseback gains of $9.7 million in the other operating income line and the remeasurement related to lease extensions generated a $41 million benefit in the aircraft variable lease expenses line. Meanwhile, total CASM was relatively flat year-over-year at $8.08 due to lower fuel expenses in the period. Our average economic fuel cost fell by 13% to $3.01 per gallon. EBIT totaled $104 million compared to a $31 million…

Enrique Javier Beltranena Mejicano

Management

Thank you, Jaime. In sum, we will continue to execute and deliver on every facet of our plan as we move through 2024. We will remain flexible adjusting for volatility and capitalizing on opportunities as necessary to drive profitability. Before proceeding to the Q&A session, I'd like to highlight the upcoming significant political campaign in Mexico over the next few months. While we anticipate minimal changes to aviation policies, the primary uncertainty will revolve around the development of aviation policies for managing metropolitan area airports. Thank you very much for listening. Operator, please open the line for questions.

Operator

Operator

Thank you. [Operator Instructions]. Our first question will come from Duane Pfennigwerth of Evercore ISI. Your line is open.

Duane Pfennigwerth

Analyst

Hi, thank you. Good morning. On GTF, I wonder have you gotten any engines back yet? How did those turn times compare with your expectations? Are you seeing parts being prioritized for grounded aircraft versus new deliveries? Can you just elaborate on spare engine availability? Was this availability that came up as a function of your negotiations and hence the higher CapEx?

Jaime Esteban Pous Fernandez

Management

Yes. Duane, good morning. We continue seeing progress, and as RTX reported this morning, they are probably in the highest peak of engines in terms of maintenance because obviously the -- was issued in January and basically all these engines are removed now and in the process of being repaired. The issue here is, A, how fast are inducting the engines into shops, A. And B, once they are in shop, are they really being inducted or they stay from patio waiting for spare parts and materials. The reason we are skeptical, A, on the turnaround times and B, in the speed that they can process this is because we have not seen, A, the inductions at the level they have promised and B, that they really start working on the engines once they have them in the shops. We have not received any powder metal engine back from the shops. I mean, we have received other engines that were repaired for all the reasons. Their turnaround time has been about 310 days, and I think that's it. That's all you asked, which was a lot.

Duane Pfennigwerth

Analyst

Yes. Sorry for the multi-part question there. But I guess when would you expect for the engines that went in for this specific issue, is it basically a year from January, so early 2025 when you will begin to kind of measure that turn time or is it sooner?

Jaime Esteban Pous Fernandez

Management

I think we're talking now more or less about 350 days or a little bit more. We delivered the first nine engines before September 15th. We think it's going to be somewhere in the fourth quarter of this year.

Duane Pfennigwerth

Analyst

Okay, great. And then just maybe an easier one, how should we be thinking about the Easter shift impact? I know that can be more of an elongated peak leisure demand period in Mexico. How do you think about the Easter shift impact to the March quarter and to the June quarter?

Holger Blankenstein

Management

This is Holger, Duane. Good morning. Clearly, the Easter shift helped the first quarter. We saw a great TRASM versus other quarters in previous years. There was one week of the Easter high season that fell into the March quarter and one into the June quarter. We're going to see in April partially also good results on TRASM and then the June quarter will have some effect and we are currently guiding to $9.2 on the June quarter in terms of TRASM.

Duane Pfennigwerth

Analyst

Okay. Thank you, very much.

Operator

Operator

One moment for our next question. Our next question will be coming from Stephen Trent of Citi. Stephen, your line is open.

Stephen Trent

Analyst

Good morning, everyone. Thanks very much for taking my question. Can you hear me okay, by the way? Hello?

Holger Blankenstein

Management

Yes, we can hear you perfectly.

Stephen Trent

Analyst

Great. Thank you for that. Phone is actually a little funny here. Just a question about, how very strong you guys have been on the unit revenue side. I've gotten client inbounds looking at you guys and wondering why some of your competitors are floundering in Latin America. Is it fair to say that, one, some of those competitors are more focused on beach destinations and you're not? And two, you guys are generating a lot more revenue outside of basic economy versus some of your competitors? I just wanted to make sure I'm thinking about that fairly and sorry for my phone.

Holger Blankenstein

Management

Clearly, a couple of things. This is Holger, by the way, Stephen. Good morning. A couple of things explain the in the first quarter. First and foremost, obviously, we had a significant decrease in capacity across the entire domestic market because of the Pratt & Whitney roundings. And also, you might recall that Aeromexico had some issues with the Boeing 737 MAX in January, which led to a capacity shrinkage in the domestic market and that clearly helped. We trimmed our network focusing on the least profitable markets and that helped push unit revenue. Second, I would characterize the market as quite rational, both in capacity and pricing in domestic market and also in our international routes. We've been working very diligently on generating or taking advantage of this capacity reduction and generating good loads, good fares and good ancillaries. The shift towards the international markets and the capacity expansion we did in the international market clearly helped our ancillary revenue performance and unit revenue. And then we already discussed this, Stephen, the fourth element here is, clearly the peak holy season Easter week, which occurred in the first quarter, which is not typical that has fallen to the first quarter. I think all these factors combined led to our strong transient performance in the first quarter.

Stephen Trent

Analyst

Great. I appreciate that Holger. And just a very quick follow-up. I believe you guys mentioned $57 per passenger in ancillary revenue. Broadly thinking and as we look down the line a year or two from now, could we conceivably see some upside on that number, assuming FX neutrality between now and then?

Holger Blankenstein

Management

Yes. Clearly, we are continuously executing our ancillary strategy. We believe that there is upside driven also by a shift to international markets and the high ancillary per passenger that international passengers buy. But we're also executing on other things, new products, better pricing, better personalization, more recurring revenue streams. Yes, we believe there is upside in ancillary per passenger.

Operator

Operator

Our next question will be coming from Michael Linenberg of Deutsche Bank. Your line is open, Michael.

Michael Linenberg

Analyst

Good morning, everyone. Just a quick question here. Jaime, you may have said the number. What are the number of aircraft that are now grounded due to the GTF issue? Where does that number peak out for the year?

Jaime Esteban Pous Fernandez

Management

Hi, Michael. This is Jaime. The average number of aircraft that we had grounded during the first quarter was 29, Michael. I think the peak we are going to experience the peak in the third Q and the beginning of the third Q for this year.

Michael Linenberg

Analyst

How much will be in third Q?

Jaime Esteban Pous Fernandez

Management

The peak is going to be on the 3Q and the 4Q. Michael, I think you better see these because there are engines coming up and coming down. Think about reduction in ASMs instead of aircraft on ground. We will be provided the average planes at the end of each quarter, but consider that guidance of reducing 16% to 18% capacity, the flight forward of engines that we expect to be AOG during the year.

Michael Linenberg

Analyst

Okay. My second question is, when we look at the operating gain that other operating expense or credit that you took in the quarter, how many airplanes or engines are underlying that? This is more of a modeling question. How does that number -- what does that number look as we move through the year? Is that the high it seems like that would be the high point and that number would come down dramatically based on your deliveries for the year. Is that right?

Jaime Esteban Pous Fernandez

Management

Okay. I'm going to talk about two lines, Michael. First, on the other operating income line, remember what we are including in that line is single leaseback gains. This quarter reflects three the single leasebacks gains of three A321 neos and also flight compensation. When you move to variable lease expenses, which are basically re-deliveries, there is where we have a one-time effect that we for the re-deliveries extensions of the 2025 aircraft and one 2026 aircraft that is going to come back to the normal number of that. We had also that benefit in the 4Q. But going forward, since we are not expecting to make decisions on extending any more aircrafts, it should be stabilized to historically numbers, Michael.

Michael Linenberg

Analyst

Okay. That's helpful then. Thank you.

Jaime Esteban Pous Fernandez

Management

Michael, if I may. I think it's important to give some color to this whole thing in fact. I mean, the first thing is a quarter, which I think it's a spectacular in terms of TRASM because Pratt doesn't compensate those anything on revenues, okay. I think that's really important to be considered. The performance there at the revenue line is real and very, very driven by the market capacity and the way we are managing our TRASM factors. The second point, which is really important is, despite we did really well on the revenue on the CASM things are going to get more and more complicated exactly because of what you're asking. Towards the third quarter, we have the largest amount of engines in repair. It is important that I don't want you guys to get bullish with the results of the first quarter, because we remain skeptical on what is coming in terms of engines during the next couple of quarters.

Operator

Operator

Our next question will be coming from Rogerio Araujo of Bank of America. Your line is open.

Rogerio Araujo

Analyst

Yes. Hi, guys. Thanks very much for the opportunity. Congratulations on the strong results. A couple here on my side. First, is there any way we can think about the net impact of the engine recall? What I mean is, if we take into consideration the compensation this quarter, but also these economies of scale that Volaris is facing and the higher TRASM that the lower flight frequencies are giving you, is this positive or negative to EBITDA and margins in your view? Anything you can -- any color you can give on that would be extremely helpful. The idea here is to think how recurring these stronger margins are for upcoming years. Thank you.

Jaime Esteban Pous Fernandez

Management

Hi, Rogerio. This is Jaime. I will say that, you should think, that this quarter was really everything about TRASM. Pratt compensation doesn't compensate for revenue loss. We've got 29 aircraft on ground and we were able to fully compensate the revenue loss of those aircraft by our own and our work and network and not the strategies that Enrique and Holger has been talking about since the last quarter. What the only thing that is helping is TRASM, because basically I'm getting compensated for the rents of the fleet that are grounded. But I'm not getting fully compensated for all of the direct cost from the grounded fleet. I think in general, the plant situation is negative for the entire business and basically, we are having a plant in order to mitigate the consequences of it.

Unidentified Company Representative

Analyst

I think if I want to add some color to that, I think the TRASM improvement will continue as much as everybody continues being careful with the capacity that they inject into the market, especially once the capacity is starting to come back. We, in Volaris, are absolutely careful and very, very detailed in the way we will re-assume the capacity into the market and we don't want to create a problem, A, on capacity or B, on pricing.

Rogerio Araujo

Analyst

This is very clear and helpful. Thank you. Another very quick question here is on this extension of aircraft lease contracts. This has been supporting the variable lease expenses line in the past couple of quarters. Should we expect further positive impacts in coming quarters or that was it? Thank you.

Jaime Esteban Pous Fernandez

Management

You should not expect that, Rogerio.

Rogerio Araujo

Analyst

Okay, perfect. Thank you very much.

Operator

Operator

One moment for our next question. Our next question will be coming from Helane Becker of TD Cowen. Your line is open. Again, Helane Becker of TD Cowen. Your line is open.

Operator

Operator

Our next question will be coming from Guilherme Mendes of JPMorgan. Your line is open.

Guilherme Mendes

Analyst

Good morning. Good afternoon everyone. Holger, Jaime, Ricardo, thanks for taking my question. I have a follow-up question on the competitive...

Unidentified Company Representative

Analyst

Can you speak up? We barely hear you.

Guilherme Mendes

Analyst

Fair now. Hello?

Unidentified Company Representative

Analyst

Yes, go ahead.

Guilherme Mendes

Analyst

Okay. Sorry, can you hear me better now?

Unidentified Company Representative

Analyst

Yes.

Guilherme Mendes

Analyst

Sorry about that. My question is on the Holger's point about competitors adding capacity in a conservative way. How overall have you been seeing the competitive environment in Mexico? Assuming that Viva will start to ground more capacity more towards the second half of the year. Do you see some kind of pressure at some point in time or the best case is for all the competitors to continue to be rational? Thank you.

Unidentified Company Representative

Analyst

As I mentioned earlier, this is Holger. Good morning. We are currently seeing a pretty rational environment in the domestic market with rational capacity allocation into the key markets, a reduction of capacity in Mexico City International Airport due to the slot situation and a good pricing environment. We are also adding more capacity and shifting capacity from the domestic market to the international market, capacity ramp up, which should ramp up fully towards the high season of June, July and we are cautiously optimistic about that capacity getting to its full potential this year. As you might recall, we have shifted 17% of the capacity to the U.S. markets in the first quarter. [Technical difficulty]

Operator

Operator

I'm detecting no audio moving forward. Our next question will be a follow-up from Helane Becker, TD Cowen. Your line is open.

Helane Becker

Analyst

Hi. Thanks very much, operator. Can you hear me now?

Unidentified Company Representative

Analyst

Yes, we can, Helane. Good morning.

Helane Becker

Analyst

Good morning. Sorry, I don't really know what happened there. But thanks for the time. Here's my question. In terms of looking ahead to the second half of the year, as you think about aircraft on the ground, how are you thinking about capacity and new aircraft coming in? I mean, I know you took two in the quarter that just ended, but have you been -- has Airbus talked to you about when the next set of aircraft will come in?

Jaime Esteban Pous Fernandez

Management

Hi, Helane. This is Jaime. We have still from the Airbus purchase order a total of 10 additional aircraft to be delivered during 2024. So far, we expect that, aircraft are going to be delivered within a month in advance or a month in delay with what Airbus is telling us and that's included in the ASM guidance for the year that we have. It includes what we expect to be coming out because of the engines and new aircraft mitigation plan extensions and those all baking in the ASM capacity guidance of 16% to 18% reduction during the year, Helane.

Helane Becker

Analyst

That's very helpful. Thank you. Just on the cash balances is, I think, 23% of LTM revenue, I want to say, I thought I read somewhere. What's your goal for that? I think in the past, it was as high as 30% plus. Where is your sweet spot for that?

Jaime Esteban Pous Fernandez

Management

Our goal, Helane, is to maintain within 25% and 30%. Right now, because of what happened in particular in the third Q last year and AOGs, we had some impact on last year. But ideally, our goal and our budget is to maintain in between 25% and 30%.

Operator

Operator

One moment for our next question. Our next question will be coming from Fernanda [indiscernible] of BTG. Your line is open.

Unidentified Analyst

Analyst

Hi. Thank you for taking my question and congrats on the results. Two questions on our end. The first is, we've heard some rumors about a possible category one downgrade from FAA. Just wanted to hear your most updated view on this matter. Second, given the volatility in oil and effect that we are seeing, just wondering how we should think about your head strategy on both things going forward. Thank you.

Jaime Esteban Pous Fernandez

Management

Hi, Fernanda. This is Jaime. We have not heard the rumor and we don't have any indication and that a new downgrade will take place for Mexico. You can take that away from your mind. In particular with hedging, we don't have any hedging for fuel or FX. We don't plan to do it for the first of the year. Very important in terms of FX to consider that, we have a natural hedge and we have an important positive revenue coming in U.S. dollars across all of our cash is 90% invested in dollars.

Unidentified Analyst

Analyst

Perfect. Thank you, very much. Have a nice day.

Operator

Operator

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

Enrique Javier Beltranena Mejicano

Management

I just wanted to day, thank you everybody for being in the call and for your very interesting questions. I think that again, it was a quarter, which was driven by execution. I think, again, I want to remind everybody the effort we did at the revenue line. As always, I would like to thank you, our family of ambassadors, the Board of Directors, your investors, bankers, resource and suppliers for their commitment and support. I look forward to addressing you all again on the next call and I will be visiting New York, Boston, and Chicago in the next quarter, so I might see everybody there.

Operator

Operator

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