Good morning, everyone. Thank you for standing by. Welcome to Volaris Second Quarter 2024 Financial Results Conference Call. All lines are in listen-only mode. Following the company's presentation, we will open the call up 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 now like to turn the call over to Ricardo Martinez, Investor Relations Director. Please go ahead, Ricardo.

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 second 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's CNBV. These statement 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 US dollars compared to the second quarter of 2023, unless otherwise noted. And with that I will turn the call over to Enrique.

Good morning, everyone, and thank you for joining us. Volaris continues to perform positively, recording our highest absolute EBITDAR for the second quarter. This achievement is notable given that we have been managing a capacity reduction driven by accelerated engine inspections for nearly one year, which has grounded approximately 1/4 of our fleet. Our unwavering focus on execution has enabled us to deliver strong results during this period of disruption. Our mitigation plan to address the challenges of the groundings is on track and yielding positive results as we have largely achieved our guidance for each period since the inspection bulletins began in last year's third quarter. Volaris execution has been focused on delivering excellent operations to enhance our customer service, aggressively managing the schedule as the fleet plan changes to minimize disruptions and continuing our emphasis on obsessive cost control. Regarding the GTF, after meeting with Pratt & Whitney recently, I can provide three important updates that make me cautiously optimistic about the situation. First, we feel confident to improve our full year ASM guidance to a year-over-year reduction of approximately minus 14% compared to our previous guidance of minus 16% to 18%. Volaris and Pratt & Whitney have successfully coordinated slots spare parts and materials with high certainty for the next 180 days. As a result, better turnaround times are forecasted for our engines during this period. Nonetheless, Pratt & Whitney is currently at its highest volume and most critical point of engine inspections. Second, powder metal has been a major focus for Pratt & Whitney and they are starting to recover by ramping up material availability and MRO capacity. Third, I was seriously impressed by Pratt & Whitney and International Aero Engines $850 million investment in the new shop and part production facility in Asheville, North Carolina.…

Thank you and good morning. Reflecting on the first half of 2024, our network planning, schedule management and customer service have been key factors in overcoming the impact of the groundings on our customers. We have turned these challenges into opportunities, consolidating our position as the leading low-cost operator in growing and attractive markets. I will explain what this means in a moment, but first, I will elaborate on Volaris second quarter operational results. During the quarter, we generated TRASM of $0.0889, a 12% increase year-over-year and a load factor of 85.5% compared to 84.6% a year ago. Despite a 17% lower capacity, total operating revenue contracted just 7% year-over-year. We now expect total revenue for the full year of 2024 to be close to 2023, even with a double-digit reduction in capacity. Ancillaries once again comprised more than 50% of our total revenues, with ancillaries per passenger rising 15% year-over-year to $53. Meanwhile, our push into non-air ancillaries continues to be successful. Our v.club membership program featuring our "zero-fare" accounts for over 15% of our sales, and our Annual Paas offering is performing well. That is what Enrique meant about generating higher repeat travel and customer loyalty among our VFR passengers. We are also delivering on punctuality. Our on-time performance within 15 minutes during the second quarter was 85.6%, with on-time departures rising eight points over our performance in the second quarter of last year. The total number of passengers transported increased consistently month by month and we announced new routes. Guadalajara to Tulum; Guadalajara to San Jose, Costa Rica; Miami to San Salvador; Cancun to McAllen; and Tijuana to Las Vegas. Our positive performance is due to several drivers. In the Mexican market, we have observed strong demand resulting in robust revenue per passenger and load factors above…

Thank you, Holger. Our second quarter financial results reflect the ongoing execution of our GTF accelerated inspection mitigation plan, robust demand in our domestic market, and our continued discipline in controlling costs. Altogether, this produced our highest absolute EBITDAR for a second quarter and met market expectations and guidance. As the topline drivers for these results were already covered, I will concentrate my comments on cost, cash flow and balance sheet. Compared to the same period last year, our second quarter 2024 results are, total operating revenues decreased only 7% to $726 million due to strong domestic demand and total revenue per passenger improvement, notwithstanding the 17% year-over-year reduction in capacity. Total CASM increased only 9% to $0.0808. Our average economic fuel cost increased by 6% to $2.86 per gallon, while CASM ex-fuel came in at $0.0533, better than guidance with an increase of 11% year-over-year. This reflects our commitment to cost control and serves as an industry differentiator. By maintaining dramatic cost control, avoiding expensive short-term wet leases and sustaining an efficient cost structure with approximately 70% of our costs being variable, we ensure our competitive advantage. In fact, we believe our cost gap compared to US peers will continue to widen over time in the cross-border market. A key principle of our network shift to the US is to increase our cash collection in US dollars and protect our P&L from foreign exchange volatility between our top and bottom lines. We estimate that around 45% of our revenue collections will be in US dollars with a target of 90% of our cash balance held also in US dollars. We booked sale and leaseback gains of $6.7 million in the other operating income line related to the delivery of two A321neo aligned with a long-term strategy of preserving the…

Thank you, Jaime. Over the past two decades, Volaris has pioneered the Mexican ultra-low-cost market. As our leadership has grown in recent years, the Mexican airline industry has become increasingly healthy and more competitive. Our industry's largest operators have successfully stimulated the market and serve consumer demand for air travel well, driving a sustained growth rate of approximately three times that of national GDP. As US nearshoring burdens, nationwide mobility and transborder transportation will become increasingly critical for Mexican economic growth. Given its strategic position and the outlook for the industry, we expect continuity in aviation policy in our region. Thank you very much for listening. Operator, please open the line for questions. Thank you, as always, to our family of ambassadors Board of Directors, Investors, Bankers, Lessors and Suppliers for their commitment and support. I look forward to addressing you all again on the next call. Thank you very much.

Thank you. The floor is now open for questions. [Operator Instructions] Our first question comes from the line of Duane Pfennigwerth from Evercore ISI.

Hey, thank you. Good morning. I wanted to ask you about the industry's ability to flex up capacity during peak demand periods. Obviously, the industry overall is pretty constrained right now. But if we think about like off-peak versus peak demand periods, would you say that peaks are even more constrained? Your commentary about July sounds pretty encouraging. I just wanted to kind of put that in context.

So, yes, clearly, the domestic capacity is constrained, both in low season and high season. We've implemented a change to our schedule where we have a very stable schedule throughout the year. And we have peak lines that we add during the peak season. The summer season, July and August is a case in point. And we are very encouraged with July trends that are currently trending above our expectations.

Okay. And then just on the full year, your capacity down about 14%, which is up a couple of points, I think, from your initial expectation. Is that more a function of your ability to acquire or purchase new spare engines? Is that what's driving that? And then, in terms of engine turn time, yes, I assume you have to get some engines back before you can actually measure the throughput or how that throughput might be changing. So when will you be in a position to measure that throughput? Maybe just like very simply, can you remind us how many engines do you expect to get back, say in 3Q or 4Q of this year?

So, Duane, the plan certainly is improving a little bit versus the original plan, being the reason that turnaround times are specifically related to the work scope, and engines need an availability of spare parts and materials. So in reality, we continue forecasting an average turnaround time of 280 to 350 days. But some engines are arriving before because of the needs in terms of spare parts and the needs in terms of materials, okay. As a result of that, we were able to manage a reduction of our forecast for the last quarter, okay. Having said that, this quarter is the highest engine process or the highest engine loss that we had during the entire period.

And this is Jaime, Duane, and adding on for Enrique. As part of the mitigation plan, as we mentioned in the last call, we were able to purchase additional spare engines, both on the PW1000 and the V2500, which are also included in that second half capacity adjustment favoring Volaris ASM production.

It's not only engines. I mean, we also have extension of the delays in terms of returning the aircraft, we also have additional aircraft. So it's the entire mitigation plan which is working in our favor right now.

Appreciate that. Obviously a lot of moving parts, but I guess just in terms of, you know, so you can measure the throughput, so we can measure the throughput. How many do you expect to get back in the third quarter and fourth quarter? If you're willing to share that?

Yes, I can share that. So we are expecting 32 engines to come back.

In the back half of this year?

In the second half of this year. But remember, then what happens is engines come back, but new engines go out. So net-net you should be thinking in ASMs, not in engines back on aircraft back. Just info on the first half of the year, we have averaged 29 planes from the first Q, 31 planes in the second Q, and that number will increase probably to 34, 35 during the third Q and the fourth Q of the year. But it's a mix, because whenever you get an engine, the number of cycles in order to send the engines to inspection grows. So it's really complicated to follow by engines and it's better just to look at ASM production.

Okay. Appreciate that detail. Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Stephen Trent from Citi.

Yes. Good morning, guys, and thank you very much for taking my questions. The first, if I may, kind of a follow-up to Duane's question. Any sort of high level view on how you think about engine supply and whether, for example, one of your latin competitors did a perpetual power agreement with one of the lessors recently. Is that something that you guys would consider? Or you don't see yourselves going that way? Thank you.

The answer is, no. Right now, no. Okay. And I don't think in the next three, four months it's going to be the case. Clearly, the problem of doing aircraft crew maintenance and insurance leasings has an impact on cost first. The second thing is, if we add capacity that way, we will be deteriorating the impact that we have on TRASM, which has been tremendously important. So honestly, in this game plan that we are doing, we do not have that considered, and we consider that it would only deteriorate the pricing environment. As always, we go back and we tell you, Steve, it's really important. We are playing here for profitability, not for market share.

And in terms of engines, Steve, this is Jaime. Most of the additional engines are purchased engines, not leased engines from lessors. Remember, we have an FHA agreement with Pratt, that also helps us on the cost side on the long-term maintenance of the engines. So we believe it's a good asset to have, considering the situation that we will be experiencing over the next 2.5 years.

Okay. Really appreciate that, Enrique. I mean very helpful. And just one quick follow-up. Curious to hear any high level views you guys may have about servicing the Tulum airport, if there's sort of anything interesting you've learned from the operations as your flights pull up?

So, Stephen, this is Holger. We have actually not started service to Tulum yet. We have announced the launch of Guadalajara-Tulum later in the year, that is already on sale, and the booking curves are shaping up relatively well in line with our expectations. But operations are going to start later in the fourth quarter.

I misheard you. Thank you, Holger, and appreciate the time.

It's the start of operations, so it's still quite a way off.

Perfect. I misheard you. Appreciate that, Holger. Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Michael Linenberg from Deutsche Bank.

Hey, good morning, everyone. Holger, when you were talking about capacity for 2025 being lower than 2023, presumably, I guess it's going to be higher than 2024, but still down. When we look at the number of airplanes that are grounded 34, 35 by the fourth quarter, third, fourth quarter this year, is that the peak? And we start seeing that come down, which will allow you to have a better capacity plan in 2024. Are you still actually going to see the number of airplanes grounded grow into the early part of 2025?

So there's obviously a lot of uncertainty around the original equipment manufacturers, both Airbus and Pratt & Whitney. We currently expect to see the peak of aircraft on ground in the third quarter of 2024. And then the situation is going to gradually improve. And, yes, we are going to add back capacity into the market next year, but we're not going to reach 2023 capacity levels yet. So it's going to be a gradual return to service, which allows us to cautiously add capacity into our most profitable markets and also into the US market. So it's going to be a gradual return to service and cautious capacity growth.

Okay, great. And then just with your revenue collection in dollars now at 45%, that feels like a high watermark. And I know that's a function of adding additional capacity into the US transborder market. How does that compare to your costs in dollars? Are they sort of in that 65%, 70% range or so? I'm just trying to get a better sense of it of the gap. I think that gap is narrowing with your additional service. Thanks for taking my question.

That's correct, Michael, this is Jaime. Around two-thirds of the cost are in US dollars and right now we're aiming to be 45% by the year-end on collections. So that gap is narrowing.

Right. Thank you.

It is really important to say that I think that at the level that we are still, the peso revenue routes are more profitable than getting into more US dollar exchange rate in terms of revenue, okay? And so I think the company is pretty -- it's in a very good position covering the cost leverage in case of the evaluation.

Very good. Thanks, Enrique.

Thank you. One moment for our next question. Our next question comes from the line of Joao Frizo from Goldman Sachs.

Hey, good morning guys. Thanks for taking my question. I just have a quick question on the guidance for the third quarter. As you guys mentioned in your previous remarks, second half of the year is seasonally stronger, right, vis-a-vis the first half. So the 32% EBITDAR margin in third quarter implies on a significant deceleration from the 36%, 37% you guys delivered on the second quarter. So I'm just trying to understand to what factors you guys attribute this weaker margin environment? Thank you very much.

So I'll start out with the revenue trend. This is Holger and then I'll pass it over to Jaime. So let me talk about the third quarter specifically on the guidance there. We are optimistic about achieving the guidance. However, we anticipate ongoing volatility in the macroeconomic variables in the second half of the year, which is influenced by the new legislative agenda of the government, proposed constitutional amendments, and the transition to the new government here in Mexico as well as the upcoming US elections. That generates just a lot of macroeconomic noise, which is outside of our control. We are, as a management team, razor sharply focused on what is in our control, which is generating positive TRASM environment, good revenues, and controlling our costs. If we apply today's exchange rate to the entire quarter, we would actually be one point higher in EBITDAR margin versus the guidance. So that shows you how sensitive our guidance is to -- or our EBITDAR is to the macroeconomic variables. I also mentioned that this quarter, the third quarter, is going to be the peak in terms of aircraft on ground due to the Pratt & Whitney situation, and that generates additional uncertainty into our revenue situation. However, if we look at the booking trends for July, we are very happy with what we're seeing and the quarter is shaping up very much in line with our guidance or probably a little bit ahead of our guidance.

That's super clear guys. Thank you very much.

Thank you. One moment for our next question. Our next question comes from the line of Tom Fitzgerald from TD Cowen.

Hi, everyone. Thanks very much for the time. Would you mind talking -- just talking about the v.club a little bit? I believe you said it's 15% of sales. How high could you -- do you think that number could get to?

Yes. So we've been focusing on our ancillary revenue strategy and generating recurring revenue from customers that are repeat customers. So we're looking at programs that generate affinity to our routes and to our offering. We have a couple of programs out there, v.club is the most important one, which is in part of the lowest fare class. And so everybody that buys the lowest fare class gets a v.club membership and then has the opportunity to buy at discounted fares for the next purchase. And that has been tremendously successful. As I mentioned during the call, we're now seeing about 15% of our segments, maybe a little bit north of that as part of the v.club membership purchases. And then we also have a subscription program which is called the v.pass, which gives you one ticket per month for a monthly subscription. So we're clearly focused on building affinity and repeat customers through these affinity programs.

Thanks. That's very helpful. And then if I may just squeeze in a follow-up. Just thinking longer term, you talk a lot about the emerging middle class and the market growth that you'd see if domestic trips per capita started approaching some of your country comparisons. What's your latest thinking on the timeline for trips per capita to get closer to Colombia or Chile? And then could that be accelerated by some of the supply chain nearshoring happening in Mexico once again?

I think that's a difficult question to answer because it depends also on the variable -- on the variables in Colombia or Chile, okay. And the participation of the ultra-low-cost carriers in both countries are growing. So I guess their air trips per capita will be growing similarly, okay. So I think the bracket is probably going to stay pretty much, I mean, the difference between them and us is going to stay pretty much the same, but both, I mean the three regions might be growing in the next five years.

Thank you. One moment for our next question. Our next question comes from the line of Jens Spiess from Morgan Stanley.

Yes, hello. Thank you for taking my question and congrats on the good results facing those child infiltration with the groundings. I just want to ask or reiterate what you already mentioned. So it seems that your TRASM guidance of $0.093, based on what you're seeing in July might be conservative. And also you prefer to be conservative on your FX and fuel assumptions, given the geopolitical uncertainty. So there might be upside potentially to your margins, right? And but beyond that, is there anything else we would -- we need to consider? For example, maintenance costs, we saw that they decreased quite significantly in the second quarter after being high in the second quarter. At what level should we assume a normalization there for the rest of the year?

Okay. I will tackle the first question. This is Jaime, Jens. Talking about macros, the macros that we assume we did not guess them. We use for FX, the Bloomberg curve and for fuel, the Platts. Look at the current macros, I think there's an upside, as you mentioned. Also on the cost side, I think, we have been monitoring that the entire year as expected in the budget, with additional ASMs that we produced. That's why we were able to reduce the CASM in the first and the second quarter. Next quarter, it also included the benefit of ASMs. But a lot of -- if you look at the maintenance line, this quarter was low compared to the prior year. That's basically timing. Those timing in CASM will occur in the second half. So we believe that the guidance that we provided for the third Q is what we expect. Obviously, if we have a better -- any opportunity to reduce CASM, we will do it. But overall during the year you can expect a CASM of around $0.055, around for the full year.

Okay. Got it. That's very helpful. And just, I mean, this might be a naive question, but how much visibility do you have on that maintenance line? And is it possible that it might deviate from what you're expecting and influence that $0.055 number you just mentioned?

I think it's predictable, because it's something that you program, and you have the maintenance program of the planes. Sometimes it moves from quarter to another quarter. But overall, we don't expect a major change going down on that line. It will be timing, basically.

Got it. All right. Thank you.

You're welcome.

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

Thank you as always to our family of ambassadors, to the Board of Directors, to our Investors, Bankers and Lessors and Suppliers for their commitment and support. I look forward to addressing you all again on the next call and thank you very much to everybody for participating today.

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