Controladora Vuela Compañía de Aviación Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 25, 2023

There are 11 speakers on the call.

Operator

Good morning, everyone. Thank you for standing by. Welcome to Velar's Second Quarter 2023 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 and answers.

Operator

Please note that we are recording this event. This event is also being broadcast live via a webcast and may be accessed through the Volaris website. Those following the presentation via the webcast may post their questions on the platform. The management team will answer them during this call, The Barclays and Investor Relations team will answer them after the conference is finished. To send your questions via the webcast platform, At this time, I would like to turn the call over to for Ricardo Montanez, Investor Relations Director.

Operator

Please go ahead, Ricardo.

Speaker 1

Good morning, and thank you for joining the call. With us today are our President and CEO, Enrique Beltranena our Airline Executive Vice President, Holger Blankenstein and Our Chief Financial Officer, Jaime Polos, they will be discussing the company's Q2 2022 results. Afterward, 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.

Speaker 1

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 Mexico's CMBP, 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 Q2 of 2022 unless otherwise noted. And with that, I will turn the call over to Enrique.

Speaker 2

Thank you, Ricardo, and everyone for joining us today. During the quarter, our company's performance was aligned with our projected full year outlook, supported by favorable macroeconomic conditions, including lower jet fuel costs and a stronger Mexican peso. We are seeing solid bookings for the summer months and remain confident in the resilience of our VFR passenger base in Mexico And the robust demand we see in Central America and the United States, we eagerly await the return of Mexico's Category 1 status And the growth in the domestic market resulting from the Mexico U. S. Nearshore.

Speaker 2

So we would like to start by reiterating our revenue and EBITDAR Margin guidance for the year. We will continue to focus on delivering total operating revenue between $3,200,000,000 $3,400,000,000 At an EBITDA margin of 21% to 31%, which is an increase of 8 to 10 percentage points versus 2022. During this last quarter, we moved capacity from the Mexican domestic market to our Central American Air Operator Certificates or AOCs, Alleviating the temporary overcapacity in Mexico and achieving a more balanced supply and demand. As a result, we consciously We reduced a few points of market share in the domestic Mexican market to achieve higher network profitability. Throughout the second quarter, We maintained total revenue per passenger flat, taking advantage of strong ancillary revenue to offset domestic base fare reductions.

Speaker 2

Additionally, we maintain healthy load factors. The Q2 of 2023 featured hallmark progress for our ancillary strategy. Our ancillary revenues As a percentage of total revenues were 49%, up from 40% in the Q2 of 2022 and 47% in the Q1 of 2023. The reduction of base fares showed The strength of our ultra low cost carrier model stimulating volume through lower basers. The load factor remained healthy in the mid-80s As we manage pricing in the domestic market to drive volumes, passengers have responded in time, resulting in RPMs Growing just ahead of ASM's year to date.

Speaker 2

International and pricing there remained robust, showcasing an Exceptional response to our increased capacity in Central America for routes to the U. S. And Mexico. Our plan for the second half of this year includes Incorporating additional capacity into this market, mainly to serve the growing BFR demand between Central America and the United States. Continuing with international year to date, we have an improvement of 6.5 percentage points on load factor climbing from high 70s to mid 80s Given strong demand in VFR markets in California, Texas and Chicago, international passengers during the semester grew 33.5% versus The same period in 2022.

Speaker 2

This quarter was focused on preparation for the future as we anticipate Mexico's imminent recovery of Our team has been proactive by planning to implement network changes in Mexico, Central America and later in the year in the cross border market to the U. S. These adjustments will enable us to relocate some of our growth Moving into our results from the quarter. ASMs grew 18% compared to the Q2 of 2022, including a 13% increase in the Mexican domestic market and a 30% increase in our international markets. Initially, we plan to return 8 aircraft this year, but decided to extend leases for 6 of them.

Speaker 2

This decision will allow us While year to date our ASM growth remains ahead of our 10% guidance for the entire year, this strength is attributable to our strategy of And in 6 aircraft for deliveries. As such, we now expect ASMs to grow around 13% in 2023, including the capacity we will deploy to the U. S. Upon Category 1 recovery. Turning back to demand, TRASM for the 2nd quarter was $7.92 a 3% increase compared to this year's 1st quarter and a 4% Reduction compared to the Q2 of last year.

Speaker 2

Our overall low factor for the Q2 was 84.6%, down 1 percentage point Year on year, April started with a healthy low factor of 85.8%, our 2nd most robust result For that month in the past decade, even considering flat traffic for Holy Week, the week long Catholic observance and the Easter holiday in the 1st week of the month. Load factors for May June were sequentially softer at 84.5% and 83.3%, respectively. However, we have identified certain temporary or one off factors that influenced this moderation. Late in May, Local and social media circulated an anonymous unsigned letter warning of a potential strike and work stoppage by Volaris flight crews in June. This story provided further reverberations in the local press.

Speaker 2

In addition, the Mexican aviation industry has been dealing with its Category 2 downgrades from the FAA for over 2 years. While there are signs of regaining Category 1 status soon, The restoration process has been long and burdensome. Mexico's aviation authorities have stated that the government has completed all the necessary You submit the requirements set by the FAA. Once the U. S.

Speaker 2

Authorities announced the upgrade, we are prepared to utilize the flexibility in our business model To redeploy approximately 5% of our total capacity to international markets in the Q4, the strategic move will alleviate pressure on those markets While providing the much needed capacity for U. S. Routes, we will also reactivate other important strategic levers Upon the return of Category 1, one of our top priorities is resuming the Kosher agreement with Frontier, which will strengthen our We can provide enhanced travel options for our passengers. Another upside of the Category 1 restoration is the opportunity to utilize the 35 NEOs Delivered to us since Mexico was downgraded. These aircraft are primarily allocated for domestic operations, meaning we are not fully capitalizing on their efficiencies.

Speaker 2

However, once CAT Area 1 is reinstated, we can leverage this modern and fuel efficient aircraft This strategic move will optimize fuel consumption and strengthen our competitive cost advantage. Moreover, it aligns with our commitment to sustainable travel. Regarding cost, our CASM For the Q2 was $7.40 making a notable 13% decrease compared to the same period of last year. This reduction is attributable to the stabilization of fuel costs from last year's high levels. CASM ex fuel stood at $4.82 for the quarter, In line with our full year expectations.

Speaker 2

This achievement was attained despite the strong appreciation of the Mexican peso, non engine availability costs And aircraft delivery delays. Moving now to our fleet growth plan, anchored around our outstanding 143 all new aircraft The book, which includes 117 A321 aircraft. This order was established along with the Indigo Group in 2017. During the Q2, we took delivery of our 1st aircraft. This is the start of an era providing meaningful fleet cost ownership reduction and sets the stage for many benefits in the coming years like low cost going lower, while our environmental impact will also be reduced.

Speaker 2

At this time, I would like to highlight significant recent commercial developments that speak to our growth strategies evolution in the future. We announced 40 new domestic routes in Mexico, 33 of which presently have no other air service. We launched Our annual pass and all you can fly annual membership program. We're now the only airline in Latin America with an offering of this nature. We founded Volaris to democratize flying and continue to pursue our mission of introducing bus riders to flying.

Speaker 2

To date, We have served over 10,000,000 first time flyers, many of whom travel with us again multiple times yearly. At Volaris, we prioritize both switching and loyal passengers. So we have partnered with OXXO, the largest retailer in Mexico For our affinity program, we have improved our ability to convert first time passengers into loyal customers. Our low fares and new affinity program are crucial In growing and retaining our customer base, our passengers repeatedly travel with us for a risk. During the Q2, among all airlines in the year's first half, Vuela registered the lowest complaint ratio at Profeco, Mexico's consumer protection agency among all airlines in the year's first half.

Speaker 2

With this achievement, Volaris demonstrated its commitment to quality and I'm glad to inform you that Volaris and Indigo Partners, Frontier and Wizz Air announced an investment in Clean Jule, The U. S.-based startup focused on accelerating sustainable aviation fuel products. Likewise, in further support of our fleet plan and sustainability program, We announced the selection of Pratt and Whitney eco efficient GTF engines for 64 Airbus A321neo family aircraft in June. This agreement also includes a long term maintenance contract. Now I will turn the call over to Holger to explain our market evolution and commercial innovations in greater Please, Holger, go ahead.

Speaker 3

Thank you, Enrique, and good morning. I am pleased to share that the Q2 of 2023 marked A period of continued robust international growth and an exciting announcement of new domestic routes to expand our network and bolster ancillary performance. Throughout this quarter, we have implemented various initiatives to enhance both the conversion of bus travelers to air passengers and increased passenger repetitiveness. Regarding our 2nd quarter results, I would like to highlight that we achieved 7 percentage points of the 18% capacity growth by driving superior utilization of our fleet, particularly on longer routes. We saw remarkable progress with a daily average of 909,000 available seat miles per aircraft per day, up from 835,000 in the same quarter last year.

Speaker 3

Additionally, we achieved 13.4 daily block hours. TRASM experienced a slight decrease in the Q2 due to reduced base fares on domestic routes aiming to recover volumes. However, this impact was offset by solid ancillary performance. As a result, Total revenue per passenger reached $93.4 higher than the $92.6 achieved in the Q2 of 2022. Total revenues per departure increased by 3%.

Speaker 3

While the overall load factor for the 2nd quarter fell 1 percentage point year on year, The domestic market saw a 3.5 percentage point reduction, nearly offset by robust 4.9 percentage points growth in the international market. Currently, we are facing a short term excess of capacity. And to address this, We have taken action to reduce capacity on domestic trunk routes. We are also reshuffling our domestic capacity to alleviate pressure on specific higher density routes and prepare for redeployment to the Central American market and the Mexico to U. S.

Speaker 3

Routes upon the recovery of CAT 1. Furthermore, we have encountered infrastructure constraints, particularly at Mexico City International Airport, where our slots have been reduced. However, in June, We announced 14 new domestic routes to connect underserved Mexican markets aiming to alleviate this pressure and provide BOSS customers with a new alternative for travel. This expansion seeks to replicate our successful models in serving VFR and leisure traffic in Tijuana and our strong base in Guadalajara. Mexico's position as the largest trading partner to the U.

Speaker 3

S. And the emergence of near shoring Create a favorable economic environment with higher employment, better wages, increased consumer spending And a stronger peso. With Volaris' strategic network concentration in the northern and central parts of the country, We are well positioned to benefit from these trends and anticipate further growth and market presence In the medium term, all the newly introduced domestic routes began operating in the 1st week of July, And we are pleased with the early turnout in traffic and loads. In addition to our success in the domestic market, we continue to experience Strong growth in Central America. Sales to U.

Speaker 3

S. Routes in this region rose by 76% in June compared to last year's levels, and passenger volume increased by 32% in the first half of twenty twenty three. To capitalize on the growing demand, we have a strategic advantage with our 2 Central American AOCs. As part of our plan, we aim to allocate up to 3 additional aircraft to this region during the second half of the year, Raising the total count to 9. Our competitors in Mexico lack alternative AOCs, leaving them with no other options to deploy additional capacity outside Mexico.

Speaker 3

So far this year, we have opened international routes from El Salvador to Houston, Miami, Oakland, Ontario and California and Guatemala to Chicago. This brings us up to 24 routes operated by our Central American AOCs and more than 1,000,000 passengers transported year to date. Turning our focus to ancillary revenue. We experienced remarkable adoption of our ancillary products in the second quarter, With our cutting edge approach driving a 25% year over year increase and a 10% increase versus The Q1 of 2023, reaching a record of $46 per passenger. Ancillary revenue contributed over $9 per passenger more than in the Q2 of 2022.

Speaker 3

Ancillary climbed to 49%, up 9.6 percentage points year on year as a proportion of our total operating revenues. These impressive results were achieved through innovative offerings, such as our V club membership program, which has seen a doubling in sales compared to the Q1. Introducing the Annual Pass, A membership that provides unlimited flights for a yearly fee will allow us to enhance our load factors for last minute bookings and sell dispersed inventory effectively. The Annual Pass provides customers with convenient and flexible travel options while maximizing the utilization of available seats on our flights. We will continue to develop our YAVA Travel Packaging program to further contribute to ancillary growth.

Speaker 3

Additionally, our affinity program through OXXO Partners has launched, making it one of the most extensive programs in Latin America. This program aims to attract more first time flyers and incentivize repeat passengers, a trend that we have observed increasing. Looking ahead, we are optimistic about our solid bookings for the summer months, supported by attractive low fares in our domestic markets. We anticipate TRASM improvement year over year for the second half of the year. In conclusion, We remain confident in the resilience of our VFR passenger base in Mexico.

Speaker 3

At the same time, we will continue to experience robust demand in Central America and the United States. We eagerly await the return of Mexico's Category 1 status and are well prepared to seize the opportunities it will bring. For the second half of the year, the seasonally stronger semester, we are looking forward to several top line tailwinds, Including solid booking curves, stable international fares, a return of CAT 1, strong Central American growth And more solid domestic network and a ramp up of ancillary projects, all contributing to lifting ancillary revenues towards 50% of total operating revenues. I will now pass the call over to Jaime to discuss our financial performance for the quarter. Thank you.

Speaker 4

Thanks, Holger. In the Q2 of 2023, Volaris posted a 27.1 percent EBITDA margin, An improvement of 11.5 percentage points. During the quarter, fuel costs normalized from last year's spike We are not forecasting disruptions in the jet fuel market for the remainder of 2023 with only seasonality driving movements in price levels. For the full year, we now expect Gulf Coast jet fuel prices in the range of 2.55 to $2.65 per gallon versus a range of $3 to $3.10 in our annual outlook. EBITDA for the quarter totaled $212,000,000 nearly double the prior year.

Speaker 4

We maintained Our full year EBITDA margin guidance in the 29% to 31% range. EBIT Total $51,000,000 with an EBIT margin of 6.5%, up from a negative 2.8% In the Q2 of 2022, net income was $6,000,000 translating to earnings per ADS of $0.05 Total operating revenues for the 2nd quarter amounted to $792,000,000 A 13% increase compared to 2022. For the full year, we maintain our top line guidance of 3.2 to $3,400,000,000 with implied revenue growth of 12% to 19% versus 2022. As Enrique explained, we now expect full year capacity to increase by around 13%, up from 10% in our original outlook, While the appreciation of the Mexican peso positively impacted our TRASM by $0.78 Our CASM was negatively impacted by $0.19 against the Q2 of 2022. Ex fuel unit cost Increase as budgeted, driven by the Mexican peso appreciation and the delivery cost, which will peak in 2023 2024 and gradually return to 2019 levels by 2027.

Speaker 4

We maintain our 2023 customer experience guidance to be in the range of $0.04 $7 to $4.00 Contrary to what has happened in other jurisdictions, Polares has controlled labor costs without any significant bump and has kept its local currency increase in line with the Mexican inflation rate. In addition, we are budgeting to improve our full time equivalent employees per aircraft at the end of the year to 58 FT

Speaker 5

feet feet feet feet feet feet feet feet feet feet

Speaker 4

feet feet feet feet Es, The same level we had in 2019 before starting to fill the void created by airlines abandon in the market. We are committed To leveraging our cost efficiency strength and cost efficiency as a primarily competitive advantage, our cost performance give us confidence That during the year's second half, we can compensate for the temporary unit revenue headwinds and OEM related fleet cost, while generating profitability in line with our full year goals. Total CASM came to $7.40 for the 2nd quarter, Falling 12.9% compared to the Q2 of 2022, our cash and equivalents for the quarter was $4.82 a 14.8 year increase. Our adjusted CASM, Excluding fuel expenses and aircraft ending viable leases expenses or delivery costs and sale and leaseback gains totaled $4.43 compared to $4.03 in the Q2 of 2022, An increase of 10.1%. Moving to fleet.

Speaker 4

During the quarter, Polari sided the 3 aircraft, bringing our total number of aircraft to 123. We have 70 Airbus Neos comprising 57% of all aircraft and are projected to close the year at 127 aircraft, considering an Airbus potential delay of at least 2 aircraft until 2024. Seatsby's departure rose to 194 in the 2nd quarter, a 3% increase year over year, and our fleet had an average age of 5.5 years. In the quarter, we booked variable lease expenses of $40,000,000 netted by selling leaseback gains of $6,000,000 Volaris finished the quarter with a total cash level of $655,000,000 representing 21% of the last 12 months operating revenue. The cash flow provided by operating activities in the 2nd quarter was $159,000,000 Cash flow used in investing activities was $102,000,000 And cash flow used in financing activities was $109,000,000 CapEx net of pre delivery payments totaled $54,000,000 in line with our full year guidance of $300,000,000 Our strategy to maintain operational reliability Driving investments of $35,000,000 in acquiring Esper Engines, the capitalized major maintenance events expenses were $22,000,000 for the quarter.

Speaker 4

At the end of the Q2, our net debt deleter ratio was 3.5 times, down from 3.8 times at the end of the first quarter. Although our focus remains on deleveraging in the midterm, we expect our net debt to EBITDA ratio to slightly surpass The initial projections for the entire year likely reaching approximately 2.8 times. This outcome is primarily influenced by the fleet related difficulties we previously addressed. Now I will turn the call over to Enrique for closing remarks.

Speaker 2

Thank you, Jaime. In summary, in the Q2 of 2023, we marked significant achievements to our Volaris, showcasing the advancement Of our diversified growth strategy and reinforcing our position as the leading Mexican airline, our web class cost has been instrumental in creating opportunities for sustained growth. As a result, we are on track to achieve our annual targets. Besides the above, we'll continue exercising prudence In a capacity and being conservative with our balance sheet, which will allow us to anticipate challenges and capitalize on opportunities in our markets We have been and continue to position Volaris for the long term. As this translates into future growth, We will drive returns for our shareholders and provide a solid long term investment opportunity.

Speaker 2

I want to close these remarks by reinforcing our commitment Thank you very much for listening. Operator, please open the line for questions.

Operator

Thank you. The floor is now open for questions. Your question is answered and you would like to remove yourself from the queue. Questions will be taken in the order they are received. We ask that when you post your question that you pick up your headset to provide optimum sound quality.

Operator

Participants can also send questions via the webcast platform. You need to click on the Ask a Question button Our first question comes from the line of Stephen Trent with Citi. Your line is open.

Speaker 6

Good morning, gentlemen, and thanks very much for taking my question. I had 2 for you. The first, if I may, when you think about the new airport in Tulum, What are your high level thoughts about servicing that airport versus also maintaining The operations that you already have in Cancun. Thank you.

Speaker 2

So Steve, good morning. Thanks for your question. I personally met the people from Tulum last week. I think it's too early in the equation to say what we will end up doing there. From the market perspective, seems to be a good alternative, But we haven't made any decisions to move further on Tulum.

Speaker 6

Okay. I appreciate that Enrique. Okay. I appreciate that Enrique. And just one other quick one.

Speaker 6

Any kind of high level view whether It's become easier or more difficult to add domestic routes since The government opened Felipe Angeles airport. I know for you guys, you added a bunch of routes and I was wondering if anything's changed in the process Or as it was before.

Speaker 3

Thank you. Steven, so we've been adding Routes to our domestic network, we've been diversifying our presence in some of the smaller and secondary cities. We announced the opening of 40 new domestic routes in the quarter, and that is the Highest number of routes we've opened in 1 quarter in the history of the company. So we continue in the same path as we've said, Focusing very much on our core market and identifying opportunities for bus switching.

Speaker 2

I would only add, Steve, that there's no change in terms of how we will approve routes to be flown in the future.

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Duane Pfennigwerth with Evercore. Your line is open.

Speaker 7

Hey, guys. Good morning. Just on CAT 1, Specifically, what should investors be watching to gain comfort that it's going to happen and the timing on when it will happen.

Speaker 2

Thank you very much, Duane. I appreciate your question. Let me tell you, I mean, Volaris is ready and prepared and will move forward in accordance with the Mexican U. S. Authorities' time.

Speaker 2

We'll focus on our core markets and our core BFR customers, and we are still sticking to the possible date, which is sometime During the

Speaker 5

Q4.

Speaker 7

I guess just a follow-up there Enrique From a U. S. Investor's perspective, what should they be watching visavis the process to gain comfort That, that timing is on track.

Speaker 2

Look, I think the first thing they need to see is that the U. S. Recognizes that there's been a big progress at the FAC, The authority in Mexico and that things have progressed tremendously. The second thing, which is really important is approval of the loss, which were already approved and are well in process. The third topic is they need to pay attention to the U.

Speaker 2

S. Bureaucracy process, which has its times and its process. And I think you guys will be gaining Confidence once they come out and they finish that process at the FAA and Start requesting the DOT to raise the category.

Speaker 7

Appreciate that thoughtful response and understand it's not an easy question. Secondly, just with respect to The comment about positive TRASM in the second half, could you put a finer point on that? Do you expect it to be both In the Q3 and in the Q4 or is it more 4th quarter weighted? And just related to my first question, is there a dependency on getting CAT 1 to bring that to fruition.

Speaker 3

Duane, certainly, we see a seasonally better second half of the year traditionally at Volaris. So certainly, We will see some uplift in TRASM versus the first half of the year. In addition to that, We do see a return of CAT 1 towards the end of the 3rd beginning of Q4 as Enriquez just mentioned. And we have a plan in place To reshuffle capacity, take some pressure off the domestic market and reallocate that to the international markets. That includes 3 aircraft to Central America, which should also help lift TRASM.

Speaker 3

So we have Certain actions in place and plans in place to improve TRASM for the second half of the year.

Speaker 7

Okay. Maybe I misunderstood. Did you say You expect year over year improvement in TRASM in the second half or just that you expect a better second half versus the first half?

Speaker 3

Both statements are true. That's what we have seen.

Speaker 7

Thank you very much. Thank you, guys.

Operator

Our next question comes from the line of Helane Becker with TD Cowen. Your line is open.

Speaker 8

Thanks very much, operator. Hi, team. Just a couple of questions on the new routes. I think you said a couple of times that there were 40 or something new domestic routes and about 33 of those have no competition. Just Kind of curious about the size of the market on a daily basis and what the load factors on those new routes Look like and is there opportunity to improve the load factor?

Speaker 3

Elaine, so yes, these 40 new domestic routes are in mostly secondary cities in the domestic market. We have a combination of target markets there. They are all Focused on generating and stimulating demand. We have some leisure routes in there from secondary cities, but we also have a lot of VFR markets in there, big focus city is Bahia, Guanajuato, Mexicali, Culiacan, so these are secondary cities that previously didn't have direct service to other cities in Mexico. As Traditionally is the case, new routes have ramp up periods in the domestic market, typically somewhere between 6 9 months.

Speaker 3

Early indications are that the routes are performing as expected, and we are stimulating The demand in these new routes with very attractive pricing and are building load factors as expected.

Speaker 8

Okay. I think that's helpful. And then as okay. And then shifting gears a little bit on The capacity plans. So, I think there was a plan to return The A319s, right.

Speaker 8

And so you have are there still A319s or are they gone? And then as you say on these routes, as you think about the right aircraft in the market, you're I mean, I would think as secondary cities, They would lend themselves to a smaller aircraft rather than a larger aircraft. But, I don't know, What's the size of your smallest aircraft now? And will it be a drag on load factors?

Speaker 5

In terms of fleet lane, we already returned to A319 this year, And we have still the fleet 3 airplanes, which are going

Speaker 2

to leave next year.

Speaker 5

Having said that, I will pass it over to

Speaker 3

So in the domestic markets, we have a mix of A321s and A320s, We have shifted capacity of the A220 to longer stage length routes and that has helped lift our productivity in the fleet and has contributed to our ASM capacity growth in the first quarter first half of the year. For new routes, what we typically do is we start with very few frequencies per week. These new routes have About 2 to 3 weekly frequencies and we employ the A320 or A321. And as we stimulate demand in these new markets, we add weekly frequencies instead of up gauging the aircraft.

Speaker 8

Okay.

Speaker 6

Helane, I have the feeling that you

Speaker 2

have a problem with our load factors and I want to make that really clear, okay? I think we did have a little bit of overcapacity during the quarter. It took us a little bit of correct that Moved some itineraries, created these new routes, moved the capacity to Central America and we ended up basically Solving the problem. So to me, what is very important to leave very clear in your mind is that there is not a demand problem. I mean, we are an ultra low cost carrier.

Speaker 2

So what we do is we basically reduce our pricing, we increase our ancillaries in the same proportion And that worked perfectly. So there's not an underlying demand reduction behind what you are asking. And I want to

Speaker 9

leave it very clear, It's not

Speaker 2

a matter of sizing of aircrafts. For us, the aircraft size is really important because of the cost. So Let's be absolutely clear. We do have the right aircrafts, the right capacity and the right loads going forward.

Speaker 8

Thanks, Enrique. It's not a load factor problem I have. It's more a capacity problem I have. Just getting over your skis and getting to I guess the way I would say it is going into markets That are secondary or tertiary with large aircraft may not have the desired effect, longer term, That's fine. You explained it very well and I appreciate it.

Speaker 8

Thank you very much.

Speaker 2

Thank you, Helane.

Operator

Our next question comes from the line of Michael Linenberg with Deutsche Bank. Your line is open.

Speaker 10

Yes. Hey, good morning, everyone. I guess, Enrique, back to your point about allocating, I guess, 5% more capacity to international markets. It does look like international is doing a bit better. If we think about the first half of the year, How much more profitable were international than domestic?

Speaker 10

And presumably, I think your domestic is probably just back of the envelope is losing money. And as we think going forward, is there a bit of a secular change here where maybe the international markets are going to generate Better margins for you going forward, maybe because some of these markets that you're in, you're the only carrier in the market, maybe it's better growth potential And maybe we're seeing a maturation of the domestic market. I know there's a lot of questions in there, but I'm trying to square Why your international are doing so much better than your domestic? And will just capacity, will that solve that? Thank you.

Speaker 3

So a couple of comments here, Michael, regarding domestic and international. Overall, Kanki, as Enrique mentioned, we do see a temporary Slight excess of capacity in the domestic market driven by the fact that our competitors have very few places other than domestic market As a reminder, we do have 2 Central American AOCs to be able to Mitigate some of the excess capacity in the domestic market for us. Now if we look at the split International and domestic, we are allocating more capacity and we have plans to allocate more capacity once CAT 1 comes back. And if we look at our cost structure against some of our international competitors' cost structure, that Cost gap has widened over the last two years and that gives us a sustainable Competitive advantage going forward, especially in the transborder market to the U. S.

Speaker 3

So yes, we are looking at Higher international growth going forward once Category 1 comes back.

Speaker 10

Okay. And then Just one quick follow-up for Jaime. I was going to ask the question about big picture is a Stronger peso, better for you, but you actually broke out the differences, the impact that it had on CASM and the impact that it had on RASM. Can you I missed it, but it looked like the way the math was, it is a stronger pace, so it's much better for you. But can you give us the impact on the 2 components?

Speaker 10

Thank you.

Speaker 5

Sure, Michael. Starting with CASM, total CASM, the impact of the better FX for the quarter was $0.49 and for the Castelve X fuel, it was 0.16 dollars In the TRASM, the effort is twice, the benefit that the impact the cost. The number on the TRASM It was $0.78 the benefit during the quarter due to the strong PES.

Speaker 10

Okay. So then when I think of Go ahead, sorry. Go ahead. Yes, we're going to say

Speaker 5

that for every 5% appreciation of the Mexican currency, EBITDA margin improves approximately in 0.9 percentage points And EBIT margin is 1.4 percentage points improvement. Sorry, I have a flu and I'm my throat is sorry.

Speaker 10

And that's every 5% movement in the currency, I guess, appreciation?

Speaker 9

That's correct.

Speaker 10

So then just to go back on the CASM ex, why did that move up a bit more than It would seem like the strong peso had some effect, but it did it seemed like there was a bigger impact there. Is that maybe because of some of the grounded Airbus is because of the GTF. Is there an issue there?

Speaker 5

Partially, yes. At this addition, remember, since the Investor Day, we mentioned because you are comparing versus 2022, The additional cost based on the redeliveries and fleet substitution, which that accounted together with the fleet related cost of 0 point 41 dollars But this is still in line with the expectations that we have, nothing to worry about.

Speaker 10

Okay, very good. You answered all my questions. Thanks everybody. Appreciate it.

Operator

Thank you. Please standby for our next question. Our next question comes from the line of Rogerio Araujo with Bank of America. Your line is open.

Speaker 9

Hi, guys. Thanks for the opportunity. I have a couple here. First one, on redelivery costs, it seems there was a 40 $1,000,000 expense this quarter. How can we read this in relation to expectations for upcoming quarters?

Speaker 9

And I understand there that Volaris is currently having higher redelivery costs than what What would you

Speaker 5

call a

Speaker 9

normalized scenario? And to when should it go? And what can we think About a normalization scenario in terms of redelivery costs, once it normalizes, That's the first one. And the second, if I may, is an ancillary revenue. You mentioned there is some projects that we are excited about for the second half of the year.

Speaker 9

Can you please give us a little bit more detail on them? I know you have touched Some, but what are you more most excited about? Thank you.

Speaker 5

Hi, Rodrigo. As mentioned, basically the deliveries, it's an impact that we are going to be seeing In 'twenty three, 'twenty four, it start going down in 'twenty five and coming back to 2019 levels In 2020 by the end of 2036, beginning of 2027. So it's a temporary bump Based on the fleet substitution, we explained a lot during the Investor Day in December. That's Basically, the main reason why the jump in those two lines notice in this quarter, which should continue the rest of the year.

Speaker 3

And regarding ancillary revenues, we have a couple of things that We are working on and we are maturing. Number 1, clearly, the uptake in our V club membership program has been Exceeding our expectations and now contributes a significant amount of our sales. And as we build that out, we're going to see improvements. Number 2, products around insurance and helping the customer Ensure for their entire trip, we're working on that. And then as we already mentioned, we just launched our Infinity program With the retail partner OXXO, that's in early stages of development, and we should see more material contribution to ancillary revenues towards the end of the year and in 2024.

Speaker 3

Overall, we have mentioned in the past that our vision is to achieve 50% Of total operating revenues through ancillary revenues, we are probably going to achieve that early than anticipated. And This is just a milestone, one milestone in our journey to offer more competitive base fares with optional value added offerings on top. So certainly, the 50% mark is not the end of the line.

Speaker 9

Okay. Very clear. If I may, one follow-up from the first question. What was the 2019 levels for redeliveries? Okay.

Speaker 9

20.20.

Speaker 5

0.20.

Speaker 9

Okay, perfect. Thank you very much. Have a great one.

Operator

Thank you. Please standby for our next question. Our next Question comes from the line of Bruno Mulgrew with Goldman Sachs. Your line is open.

Speaker 9

Yes. Good morning, everybody. Thank you for the opportunity to ask the question. I just wanted to Have you helped to better understand the changes to the guidance with fuel cost The fuel prices have fallen significantly year to date. So the environment now from a cost perspective

Speaker 2

is much better than before.

Speaker 9

And even so, you are not increasing your margin guidance for the year, which might suggest some weakness on the pricing side visavis what you were expecting Earlier in the year, of course, Category 1 might play a part here, but correct me if I'm wrong, but you were not expecting A major contribution from category 1 this year, right? Maybe you are now counting on the slight delay that is the initial plan. So What's happening there? Is demand weaker? Is competition fiercer?

Speaker 9

Any color there would be helpful. Thank you so much.

Speaker 2

So in general, there's a lot of things happening in The revenue question, which I think are important. The first one is, we do have to balance capacity for the 3rd quarter end of Q3 and Q4, based on what is going to happen both with engines, B, there's 2 aircrafts that are being delayed by Airbus that will not be arriving towards the end of the year. See, there's obviously because of the economies in the U. S. And Mexico, some reduction of pricing.

Speaker 2

And in general, we are trying to balance the new capacity versus the old capacity, The introduction of new routes in the U. S. Because of category 1 has also a ramp up, okay. So In general, those are the most important factors, but too many things happening in the equation. Having said that, I think Speaking to our EBITDA margin guidance is something really good and it takes us back To a level from 29% to 32%, which is really good, 31%.

Speaker 9

Thank you.

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Alberto Valerio with UBS. Your line is open.

Speaker 9

One quick one from my side. We heard today in the morning that Patna will be recalling 200 engines for Extra maintenance. I would like to know if Volaris has one of these aircraft with those engines or any of Volaris competitors in Mexico. Thank you.

Speaker 2

That's correct. We heard Raikung in their conference this morning that they have determined the rare condition in power Metro used to manufacture certain engine parts, which will require accelerated fleet inspection. They're calculating about 200 engines that need To be inspected by mid September of this year and it's going to be a program, a progressive program, which is calculated to be in the following 6 months. Thanks, Scott. The company planned to Retained 6 of the aircrafts that were supposed to leave this year and we extended those 6 aircraft And that decision will allow us to better handle better any operational challenges related to engine availability and aircraft delivery delays During the last two quarters, okay.

Speaker 2

Too early to calculate what's the real impact and where it's Going to be the impact, but I think the company has the provisions and has been working In an accelerated way to try to control the impact.

Speaker 9

Okay. Thank you.

Operator

Thank you. I'm showing no further questions. This concludes today's question and answer session. I would now like to invite Mr. Barry, Mr.

Operator

Barry, will proceed with closing remarks. Please go ahead, sir.

Speaker 2

Thank you very much, operators. As always, I want to thank our family of ambassadors, the Board of Directors, the investors, the bankers, the resource suppliers For their commitment and support during another quarter, I look forward to addressing you all again in October and Hopefully, I can see some of you in September when we celebrate 10 years of being public. Thank you very much to everybody. It was a great pleasure to be with you this morning.

Operator

Ladies and gentlemen, this concludes the Valeris conference call for today. Thank you very much for your participation and have a nice day.

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Earnings Conference Call
Controladora Vuela Compañía de Aviación Q2 2023
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