Controladora Vuela Compañía de Aviación Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 27, 2024

There are 14 speakers on the call.

Operator

Good morning, everyone. Thank you for standing by. Welcome to Volaris 4th Quarter and Full Year 2023 Financial Results Conference Call. All lines are in listen only mode. Following the company's presentation, we will open the call for your questions.

Operator

Please note that we are recording this event. This event is also being broadcast live via 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.

Speaker 1

Good morning, everyone, 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 Pos. They will be discussing the company's 4th quarter and full year 2022 results. Afterwards, we will move on to your questions. Please note that this call is for investors and analysts only.

Speaker 1

Before we begin, please remind everyone 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 results to differ materially from expectations, as described in the company's filings with the United States SEC and Mexico's CMBB. 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.

Speaker 1

Dollars compared to the Q4 of 2022 unless otherwise noted. And with that, I will turn the call over to Henrik.

Speaker 2

Thank you, Ricardo, and thank you all for joining us today. During 2023, we learned a lot when resizing the operations and turned a very complex situation into a solid financial result for the Q4. On an absolute basis, we recorded our highest ever historical quarterly TRASM. Not only that, we were profitable for the quarter posting a net income of 100 and $12,000,000 Our quarterly and full year 2023 performance demonstrated resilience in the face of the challenge encountered throughout the year such as the extended FAA downgrade of Mexico to CAT II, aircraft on ground AOGs due to Pratt and Whitney Pareto accelerated inspections and slot restrictions at the Mexico City International Airport. These challenges have tested our managerial and operational flexibility and the mitigation plan outlined in our recent earnings call has proven effective.

Speaker 2

Now let's review how we closed the 4th quarter. Operating revenue grew 9.6% year over year with unit revenue rising 10.7% on ASMs that contracted 1.1%. EBIT and EBITDA margins expanded by 11 points and 6 points, respectively, versus the same period of 2022. I think it is important to emphasize the value of the lessons we learned during the 4th quarter's rapid changes. We took advantage of strong demand while adjusting our network size, placing focus on prioritizing passenger service, which led to positive outcomes.

Speaker 2

We improved our proficiency in implementing effective cost control measures. We acknowledged the crucial significance of being proactive, and our management and teamwork showcased our competitive advantages, including flexibility, effective negotiations and crisis management. Moving to the engine preventive accelerated inspections, remember that in November, we signed a compensation agreement with Pratt and Whitney. The agreement will help to address certain fixed costs associated with aircraft groundings during inspections and will complement outline mitigation initiatives, which Jaime will explain the accounting details. Volaris analytical tools for predicting engine performance has proven accurate, ensuring our successful efforts towards maintaining a reliable passenger schedule.

Speaker 2

However, despite an approximate 30% increase in shop capacity announced by Pratt, persistent delays in materials availability at engine shops are anticipated. This will result in wing to wing turnaround times exceeding 350 days. Inspections are likely to extend into 2026. Pratt is working hard ramp up production of new materials, including full life disks, improved seals, thermal foils, new software that eliminates vibrations, plus several other structural improvements that will be initially incorporated for new aircraft deliveries and will be available later this year for engines inducted for shop visits. Most important, Pratt is standing behind its product.

Speaker 2

Polar's top priority has always been the safety of our ambassadors and our customers. Since June 2023, we have grounded 16 aircraft on average per month, impacting roughly 6.5% of our future bookings. To address this, during the second half of last year, we needed to re accommodate and or compensate affected passengers, which meant absorbing in a resize capacity low fare bookings that consequently diluted unit revenues and added some incremental costs. Beginning in October, however, we started to see positive outcomes from our capacity rationalization efforts. We reduced capacity in the domestic Mexican market, while we continue to re accommodate our affected passengers.

Speaker 2

Additionally, overall Mexican domestic market capacity contracted as we along with our one of our domestic competitors progressively removed GTF engines for inspections. At the same time, we instituted strategic commercial measures to protect our financial performance. In domestic Mexican domestic market, we canceled routes in the ramp up phase and adjusted frequencies on oversaturated routes. Furthermore, we strategically reassigned capacity in the U. S.-Mexico international market, focusing on routes for enhanced loads and higher unit revenues rather than pursuing market share.

Speaker 2

For 2024, we anticipate that on average, our network on an ASM basis will approximately 45% international and not a little increase from 35% in 2023, which will increase U. S. Dollar denominated revenues. We successfully boosted ancillary revenues to an all time high accounting for over 50% of total operating revenues in the 4th quarter. Simultaneously, we have effectively managed our labor force, reducing its size in headcount, while sustaining productivity at over 80 hours per month for each pilot and flight attendant.

Speaker 2

Another key focus is liquidity. At year end, our cash position was at a level comparable to last year's balance. Additionally, our debt maturity profile and leverage remained healthy. Our ongoing efforts to mitigate risks will safeguard profitability and align with our primary objective of generating shareholder returns in accordance with our long term strategy. For this year, Volaris' strategy is based on 3 core pillars.

Speaker 2

The pillar number 1 is fleet and capacity. Our dedication lies in preserving business continuity, while minimizing disruptions to our core operations, flight service and passenger experience. To achieve this, we secured additional capacity that will supplement for some of our GTF inspection impacted fleet. Accordingly, we executed lease extensions on aircraft that were scheduled for redelivery and secured straight operating leases for additional aircraft, thereby balancing capacity reduction with operational recurrence. Furthermore, we successfully negotiated the acquisition of additional spare engines.

Speaker 2

During this quarter, Volaris analyzed wet lease capacity and we concluded that it was not strategically productive or cost efficient. Regarding growth, it is important to note that as a capacity returns to our fleet in 2025, we will be prudent and rational. Notably, building on our lessons learned, we now have significant flexibility with our scheduled deliveries of new aircraft and lease expirations that will allow us proactively manage capacity and prioritize profitability. We focused on our passengers by clearly and consistently communicating capacity and route availability. Our efforts have proven effective despite Volaris' advanced booking profile being particularly challenging and sensitive.

Speaker 2

Pillar number 2, network optimization and profitability. We view our GTF capacity reduction as an opportunity and we will capitalize on this opportunity to achieve strong profitability as we did bouncing back from the pandemic. Our strategy involves redesigning our network and reallocating capacity to prioritize profits over defending market share in highly competitive sectors. Capitalizing on the return of category 1, we plan to increase higher margin international flights and take advantage of reduced capacity throughout Mexico aiming for stronger yields and unit revenues without compromising network defensibility. We're boosting TRASM and effectively managing CASMETS.

Speaker 2

Our demand is distinct and more elastic, driven by appealing prices and safety for bus switching passengers, the convenience for growing adopters and frequent passengers and the resilience of our DFR network. We anticipate ancillaries to constitute more than 50% of our total revenues. We expect this to further enhance our profit profile with attractive margins. The labor market in our regions varies significantly from that in the United States. Additionally, we distinguish ourselves by maintaining a healthy balance sheet.

Speaker 2

Here's where Volaris stands out from the U. S. Industry and low cost carriers in South America. Notably, for example, we recently agreed a mutually satisfactory 5% wage increase in Mexican pesos for 2024 effective February 1. All of the costs remain controlled with lower ASMs expected to be the primary constraint on cost performance this year.

Speaker 2

Important to note that once the capacity is reinstated, our cost advantage will increase versus our competitors. Pillar number 3, elevating passenger experience and cultivating talent for future growth. In previous disruptions, we've navigated challenges while laying foundations for long term growth, and this time is no exception. During this pause in our growth, our focus on differentiating Volaris includes renewing the customer promise to foster a positive brand perception, offer a new optimized and reliable schedule with no need for further cancellation, investing in technology as a growth platform and balancing short term efficiency with long term talent needs. Before I turn the call over to Holger, I want to highlight that our valued ambassadors consistently demonstrate exceptional dedication and work ethic.

Speaker 2

I am optimistic about our market guidance, supported by positive trends in TRASM, Our successful execution of the capacity reduction and itinerary realignment further strengthens this confidence. Moving forward, we will continue to prioritize profitability and will maintain a conservative approach to managing our balance sheet. I would now like to turn the call over to Holger, who will cover our Q4 operational performance and commercial plan for 2024.

Speaker 3

Thank you, and good morning, everyone. Overall, we had a very dynamic 2023 that featured strong headwinds and robust demand throughout our network. During the last year, we navigated the prolonged recovery of Category 1, government related capacity reductions at Mexico City International Airport and the announcement of GTF engine related accelerated inspection, leading to aircraft grounding. Despite these challenges, we grew increasing ASMs by 10% compared to 2022 and expanding our fleet by 12 aircraft. Our full year 2023 results included a robust 4th quarter, which benefited from strong demand over the holiday season, our excellent operational execution and steps to address the impact of the aircraft on ground.

Speaker 3

For 2023 as a whole, ancillary revenues represented 49% of total revenues, an increase of approximately 8 percentage points compared to 2022. Throughout the year, we implemented initiatives contributing to this increase. In spring, we introduced the annual pass, allowing Volaris customers to fly as much as they want, only paying airport fees. We are approaching 30,000 annual pass flyers in under a year. Our V club membership, featuring the new 0 fare ticket, continues to attract strongly, contributing to 15% of our ticket sales.

Speaker 3

The unbundled fare is gaining traction with smaller businesses, and we are tailoring it more to cater to this segment. Now double clicking on the Q4. Our network wide load factor rose to a strong 88.1%, including a 91.8% load in our Mexican domestic market. We managed capacity so that RPM growth was flat despite a decrease of 1% in ASM, highlighting demand remains especially strong in our core markets and station. However, in the Q4, we had to reduce domestic ASMs by 11.2% year over year, while growing international ASMs by 21 point 7% due to the accelerated inspections required by Pratt and Whitney.

Speaker 3

Our capacity focus was on adding frequencies to the U. S. Transborder market, capitalizing on the restoration of Mexico's Category 1 to strengthen our presence in the U. S.-Mexico market. This not only allowed us to reallocate capacity from concentrated domestic markets, such as Tijuana and Guadalajara.

Speaker 3

We also addressed dilutions in the Central American market caused by the accelerated capacity we added last year. Notably, 4th quarter TRASM increased to USD 0.096 marking a 10.7% rise compared to last year, an achievement ranking among the best in our history. It's important to highlight that despite witnessing strong fare trends in the domestic market, including a 17.4% increase in December, our

Speaker 4

average base share in

Speaker 3

the 4th quarter was actually 2% lower than last year. Instead, unit revenue was primarily driven by effectively capturing demand and by robust growth in our ancillary offering. We have now achieved our target of over 50% of our total operating revenues. In summary, our revenues per packs continue to be very strong, while we observe unit revenue pressures reported by our U. S.

Speaker 3

Peers. Ancillary per pack reached $55 in the 4th quarter, a 33% increase and registered $61 in December as holiday flyers increasingly chose our ancillary offering. Looking ahead to 2024, we believe ancillaries will reach 50% of total revenues for the entire year for the first time. Our initiatives to evolve our offering this year include continuously optimizing pricing through personalized and advanced pricing strategy launching new products and services, including insurance option designed to offer flexibility and increase the presence of our co branded credit card leveraging recurring revenue streams through initiatives like V Club membership services to encourage repeat service and customer affinity creating a new mobile app that will improve the overall passenger experience. On a different note, our transported traffic between Mexico and the U.

Speaker 3

S. Demonstrates consistent growth prepared by the positive impact of Nirschhorn and the need for mobility. We believe that any potential new restriction to land border crossing will have no negative impact on our transborder air traffic. It is crucial to emphasize that the foundation of our traffic between the U. S.

Speaker 3

And Mexico, particularly along the border regions, is rooted in our robust network strength in the northern part of Mexico, and it has proven resilient through several cycles. Our leisure traffic to the Mexican beaches continues to thrive. Unlike the challenges faced by U. S. Carriers, our leisure network predominantly caters to the domestic market.

Speaker 3

None of the domestic Mexican carriers have allocated surplus capacity to these markets, contributing to a robust and sustainable nature of our operations in this segment. Optimizing our international revenue mix is a key driver of our enhanced financial performance. The inclusion of longer flight sectors not only ensures a more efficient utilization of our fleet, but also holds the potential for other substantial benefits. We estimate to reach around 50% of our collection in U. S.

Speaker 3

Dollars in 2024, reducing foreign exchange exposure on our P and L. The positive trajectory extends further with the increasing adoptions of the ancillary offerings, particularly popular among passengers on extended journey, Combined with improved domestic yield attributed to lower industry capacity, we are poised for robust travel results in 2024. This encouraging trend initiated in the Q4 of 2023 is already evident and booking curves indicate a continuation of this favorable trend in the coming months, aligned with our 2024 guidance. Passenger experience remains a priority. However, in the second half of last year, our passengers experienced an unfortunate number of cancellations due to the mentioned challenges earlier on.

Speaker 3

We are committed to reversing this trend in 2024, completing a more reliable schedule. Our priority will be delivering the Volaris promise to our customers and flying them reliably, safely and on time. We are doubling down on making all interactions with Volaris self-serviceable, especially for the day of departure. This will enhance customer satisfaction with an increasing mobile affinity. This effort remains crucial for fostering strong and recurring demand for the Volaris product.

Speaker 3

Regarding the network, this year, we generate a more balanced ASM production with a split of around 55% in our Mexican domestic market and 45% international. The restoration of Category 1 will further support capacity allocation to the United States, enabling us to increase frequencies on historically profitable routes. We are excited about our partnership with Frontier Airlines. Despite the disappointment of Mexico's Down Rate Category 2 in the past 2 years, which impeded us from fully capitalizing on this collaboration, we are keen to revive our engagement this year and anticipate achieving significant outcome. We are well positioned with our enhanced brand presence and greater distribution power.

Speaker 3

Concurrently, we've witnessed Frontier's growth in their market position. It's important to highlight that our partnership with Frontier remains genuine, featuring a culture and an overarching marketing collaboration. The absence of an ATI with Frontier underscores the authenticity of our relationship. As we move forward with reactivating this partnership, we eagerly anticipate operating on a more level playing field. In Central and South America, we are also planning capacity adjustment and a smaller footprint where markets are demonstrating sufficient capacity.

Speaker 3

In summary, we see the opportunity to have a positive 2024 by delivering on our ongoing commitments, increase TRASM through better fares, improve loads, a strong network and ancillary growth ensure cost leadership and simplicity deliver exceptional passenger experience and extract value from our network and ultimately become the preferred carrier in our market. I will now turn the call over to Jaime to discuss our financial performance for the Q4 and full year 2023.

Speaker 5

Thank you, Holger. We are pleased to report that despite external challenges discussed earlier, our 4th quarter performance allows to turn an accumulated loss in the 5 9 months into a positive net income. Compared to the same period last year, our Q4 2022 results are total operating revenues of $899,000,000 a 10% increase, notwithstanding the 1% year over year reduction in ASMs due to the continued strong demand and outstanding ancillary revenue improvement. CASM was $0.0731 decelerating 2% year over year. Fuel was a driver of the decrease with our average economic fuel cost falling by 16% to $3.13 per gallon, while CASM ex fuel increased 11% and total $0.0486 Before discussing profits, it is important to note that during the Q4 compensation from Pratt and Whitney is included in the P and L, mainly as part of the other operating income.

Speaker 5

This account in 'nineteen also includes aircraft sale and lease by gains and other accrual cancellations. As part of the mitigation plan for the engine inspections, we extend an aircraft leases not only for 2024, but also for 2025. EBIT totaled $164,000,000 an increase of 173%, reflecting the improvement in TRASM, the benefit of aircraft lease extensions and favorable fuel costs. This resulted in a margin of 18 percent and 11 percentage points increase. EBITDAR totaled $281,000,000 a 35% increase.

Speaker 5

EBITDAR margin was 31%, an improvement of 6 percentage points. This is a significant shift from our performance in the 1st 9 months of the year. Net income rose $212,000,000 translating into earnings per ADS of $0.96 The cash flow provided by operating activities in the 4th quarter was $280,000,000 cash outflow using investing and financing activities were $113,000,000 dollars 82,000,000 respectively. Now moving to our full 2023 year results, our normal financial performance stands out compared to 2022. Total operating revenues of $3,300,000,000 an increase of 14%, CASM of $0.71 a 1.7% decrease over 2022.

Speaker 5

The average economic fuel cost for the full year decreased by 18% to $3.11 per gallon. CASM ex fuel of $4.81 reflecting a 12.8% increase. I want to emphasize that both total operating revenues and CASM ex fuel results align with our annual outlook even as we initiated the aircraft grounding in the Q3. EBIT was $223,000,000 up from $44,000,000 for 2022 with an EBIT margin of 7%, up 5.3 percentage points. EBITDAR came in at $823,000,000 an increase of 40%, while EBITDAR margin was 25%, an increase of 4.7 percentage points.

Speaker 5

Net income was $8,000,000 translated into earnings per ADS of $0.07 Volaris finished the year with a total liquidity position of $789,000,000 representing 24% of the last 12 months operating revenue. Our net debt to EBITDA ratio decreased to 3.4 times from 3.9 times at the end of 2022. The short term maturities of our financial debt are attributed to pre delivery payments, which shareholders will eventually return upon aircraft delivery. In other words, Volaris has low and manageable refinancing exposure in the short to medium term. Our CapEx net of fleet per delivery payments amounted to 152,000,000.

Speaker 5

As of December 31, our fleet comprised 129 aircraft, up from 117 aircraft a year ago. Seatsby departure were 197 in the 4th quarter and our fleet had an average age of 5.7 years. Looking forward, we are working diligently on our fleet plan with Airbus and are maintaining our near term aircraft delivery schedule. We expect 17 scheduled aircraft deliveries in 2024 2025, all with PDP financing and Cenalizba commitment. We are entering this year with important financial tailwinds that put us in a good position to meet our yearly goals.

Speaker 5

Therefore, our outlook continues as follow. For the Q1 of 2024, we expect a reduction of 16% to 18% year over year, TRASM of $0.085 to $0.087 is the capacity reduction and the specific fixed cost linked to the grounded fleet, not fully compensated or Pratt's AOG relief. And finally, we expect an EBITDA margin of 25% to 27%. For the period, this outlook assumes an average foreign exchange rate of MXN 17 to MXN 17.20 per U. S.

Speaker 5

Dollar and an average economic fuel price of approximately $2.55 to $2.65 per gallon. For the full year 2024, we expect ASM reduction of 16% to 18% year over year, EBITDA margin in the range of 31% to 33%, CapEx net of finance fleet pre delivery payments of approximately $300,000,000 Our full year 2024 outlook assumes an average exchange rate of MXN 17.70 to MXN 17.80 per U. S. Dollar and an average economic fuel price of approximately MXN 2.50 to MXN 2.60 per gallon for the year. Now, I will turn the call over to Enrique for closing remarks.

Speaker 2

Thank you very much, Jaime. Before we begin the Q and A session, I want to emphasize that Volaris is dedicated to our ambassadors and customers' safety and well-being. As airlines play a crucial role in connecting communities, we must exemplify safety, reliability and humanity. In practice, this philosophy encompasses the safety first mindset discussed today and our participation in relief efforts. Last October, we provided free transportation for emergency responders, volunteers, stranded tourists and transported humanitarian cargo to from the Acapulco region after the devastation of Hurricane Otis.

Speaker 2

In January, we hosted an event discussing the role of air transportation in preventing child and adolescent traffic. Additionally, in commemorating 10 years of Volaris joining Ecopath, a non government organization dedicated to fighting child exploitation and trafficking, we signed an addendum to expand the protocol to our operations in countries of Central and South America. We will continue to reaffirm our commitment to the people in the communities we serve. We're confident that our corporate sustainability initiatives will foster long term commitments from our stakeholders. As we discussed today, we have spent the past 18 years creating advantages for Volaris that make us different.

Speaker 2

We primarily serve the resilient VFR market and attract first time flyers. Our controllable costs remain in check. Our network has been planned to capitalize on the return of CAT 1 and our closure with Frontera is not threatened. Volaris balance sheet is strong and our fleet plan is flexible. Our strategies have proven effective and resilient.

Speaker 2

These unprecedented market conditions represent an opportunity to shape our focus from establishing our industry profile to prioritizing Thank you very much for listening. Operator, please open the line for questions.

Operator

Thank you. The floor is now open for to provide optimum sound quality. Those following the presentation via the webcast may post their questions on the platform. The management team will answer them during this call or the Volaris Investor Relations team will follow-up after the conference call is finished. Our first question comes from the line of Duane Pfennigwerth of Evercore ISI.

Operator

Please go ahead, Duane.

Speaker 6

Hey, thanks. Good morning. So I wanted to ask you about your international mix. Before the GTF issues showed up, you had a plan to increase international when Category 1 came back. And now given the fleet constraints, you're redeploying to international, but also cutting back domestic something like 25% in the first half of this year.

Speaker 6

So I guess the question is, what do you think is the ideal? If you didn't have these fleet constraints, what do you think the ideal mix of domestic versus international? Is there anything about how your network is being reconfigured today that's sort of surprising you positively? Maybe 45% or 50% is the right mix?

Speaker 4

So Duane, for the full year, as we said in the call, we are planning to get to 45% international, 55% domestic, and that is very much in line with what we had planned. We will add more flying lines to the U. S. So we will see an increase in capacity despite a full year reduction of all overall network capacity. Most of the reduction will come from the domestic market.

Speaker 4

So we're not planning any decline in the U. S. And if you look at the Q1, the domestic reductions in ASMs will be in the high 20 percentage points and the international will actually increase by 9% approximately, 9% to 10%. But clearly, I need to underline that we will not abandon any of our core domestic markets. So we will continue to defend them and be very present in those core domestic markets.

Speaker 6

Okay. I guess just a follow-up there Holger. Do you think this 45% mix is closer to optimal? Or if you had blank sheet of paper, would it be back to the 30% that you were doing historically?

Speaker 2

I think we had too much capacity in the domestic market, Duane, as we always underline it during the last year. And we had to shift some of that capacity to the U. S. So the answer is by now the mix, I think it's the right mix, plus it gives us the advantage of this foreign exchange protection by having almost 50% of the collections in U. S.

Speaker 2

Dollars. We are protecting the 62% leverage that we have or exposure that we have on foreign exchange on the cost side. So it's balancing very well right now and I think the target for this year is very optimal.

Speaker 6

Okay, great. And then just to follow-up on the GTF grounding, what is the incremental update today? What have you learned from Pratt over the course of the last quarter? And how should we be thinking about the timing of the resolution of these issues? In other words, is it sort of consistent with what you were thinking?

Speaker 6

Is it longer? Is it shorter? And I guess the punch line as it relates to Valeris, I know it's very, very early, but how should we be thinking about 2025 growth? I assume it's a very wide range of outcomes, but I just could capacity be down again next year, for example? And thank you for the thoughts.

Speaker 2

Well, I think, Duane, we keep on managing things like one day at a time, okay? So that's very important. As I said during my exposition, our analytical tools for predicting engine performance have proven to be accurate and we have ensured a successful effort for that. Having said that, as I said, Pratt is taking a little bit more time at the shops because of lack of materials, okay? And but what we're seeing is an accelerated process fixing the different prompts that they have.

Speaker 2

And we strongly think that 2025 is still going to be like that, somewhere around 350 days to 400 days on shop. And then eventually, I would say somewhere like February, March of next year, we might see a reduction that might affect the numbers for next year, but that's just a prediction based on today's forecast. And I don't want to say that it's going to be shorter right now. I just wanted to say that they are I think we are in the right process towards the right solution.

Speaker 6

Okay. Thank you for the thoughts.

Operator

Thank you. Our next question comes from the line of Stephen Trent of Citi. Your question please, Stephen.

Speaker 7

Thank you very much, gentlemen, and good morning. Can you hear me okay, by the way?

Speaker 8

Yes, we hear you well.

Speaker 7

Great. Thanks very much Enrique. So just one or two quick ones for me. I think first as a follow-up to Duane's question. When we think about the greater emphasis on northbound U.

Speaker 7

S. Routes, Fair to say kind of near to medium term, there should be less expansion on these domestic interstate plus routes in Mexico?

Speaker 4

Yes, that's correct, Stephen. We accelerated our expansion into the U. S. So we're going to have a higher percentage of our business in the international this year, and we will shrink capacity in the domestic market, absolutely.

Speaker 7

Great. Thank you, Holger. And just another related question to that. If you could refresh my memory, very helpful color on domestic versus international. But within that, could you unpack a little bit, how you're thinking now about Central America to U.

Speaker 7

S. Nonstop or Central America to Mexico?

Speaker 4

Yes, Stephen. So last year, we accelerated our expansion in the Central American market to the U. S. Given the restrictions in Mexico with CAHPSA II, status of Mexico. This year, we have rightsized the Central American capacity.

Speaker 4

We're reshifting some of the capacity back to the domestic market in Mexico and to the Mexico U. S. Market. So we will see a slowdown of the accelerated growth that we saw last year. However, Central America continues to be a cornerstone of our growth strategy and we believe in the long term opportunities in Central and South America.

Speaker 2

If I may Holger, I think it's really important to understand that the whole move that we're doing remains within our core practice of shifting passengers from the buses into the aviation market and the markets that we are tackling are also bus markets and the capacity is being reinforced in those markets all over the place in Central America, in Mexico, in Mexico to the U. S.

Speaker 7

Okay. Super helpful. That makes a lot of sense. Many thanks, gents.

Operator

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

Speaker 9

Hi, good morning, guys. This is actually Shannon Doherty on for Mike. Just my first question, Mexicano has been up and running for about 2 months now. Are you seeing any goodwill competitive impacts thus far?

Speaker 2

All know that Mexiclena is flying with very small traffic volumes. And I think that's basically where we are. And they are only operating out from Adeopuerto Felipe Angelis, the new airport. And that's those are the facts. I cannot comment on anything further on.

Speaker 9

That's fair. And maybe to elaborate a little bit on Steve's question, how are your Costa Rica and El Salvador operations doing? Can you remind us how many aircraft are under these certificates today? And maybe how this has been impacted by the GKS grounding versus your original plan for 2024? Thank you.

Speaker 4

So Shannon, thank you. So currently, we are planning for this year 6 aircraft in the region. We have 2 AOCs in Costa Rica and in El Salvador. The traffic is mostly focused on U. S.

Speaker 4

To Central America, which is really an extension of our core business, the core VFR business that we're also operating between Mexico and the U. S. We don't see any effect on the Central American business due to the GTF engine issues. We have been able to shift around capacity so that the impact on our Central American business is not there. And as I said, we continue to believe in the Central American opportunities.

Speaker 9

Thank you.

Operator

Thank you. Our next question comes from the line of Rogerio Araujo of Bank of America. Your line is open, Rogerio.

Speaker 10

Thank you. Hi, guys. Thank you very much for the opportunity. I have a couple here. One is on costs.

Speaker 10

If you could please provide some incremental information on the aircraft and engine variable lease expenses. This line became positive this quarter. What can we attribute it to? And also the other operating expenses line came much above what we were seeing in past quarters. What could explain that?

Speaker 10

Any one off impact? And what is the recurring level going forward? This is the first one. And then I can make the second one later. Thank you.

Speaker 8

Sure. If you look at the aircraft containing variable lease expenses, it accounts for the remerging net due to

Speaker 5

the extensions of the planes that

Speaker 8

we took and also the redelivery re measurements. Remember, as part of the mitigation plan of the AOEs, we extended planes, we bought planes not canceled some of the provisions.

Speaker 10

Sorry, I think I missed the other operating expenses explanation. Sorry about that. The other operating expenses

Speaker 8

is basically as a result of the growth of the business. Consider that we have added 12 aircrafts into the business that we ship capacity into the U. S. Markets in the 4Q. So the line is not any specific onetime effect.

Speaker 8

It's just as part of the natural growth achieved of the mix within the domestic and international.

Speaker 10

Okay. Pretty clear. Thank you. My second question is regarding margins. So the 31% to 33% margin guidance for this year, it is somehow negatively impacted by a lack of scale and all the SG and A costs that are not being diluted into more capacity.

Speaker 10

But at the same time, it has a positive effect on the compensation from Pratt and also the higher yields that this capacity constraint is causing. Any guess on what is going to be normalized margin when aircrafts are back to operate in terms of you having a positive effect on cost dilution, but at the same time, a negative one on margins and the compensation already done? What would be your best guess on a normalized margin level going forward? Thank you.

Speaker 3

[SPEAKER JOSE HUMBERTO ACOSTA MARTIN:]

Speaker 8

I think our target is to be profitable, and our goal midterm will be to consistently deliver a lowtomisseries EBITDA margin. That's the goal.

Speaker 10

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

Operator

Thank you. Our next question comes from the line of Helane Becker of TD Cowen.

Speaker 11

Thanks very much, operator. Hi, guys. Can you just comment I have 2 questions. 1 on how we should think about the maintenance credits? And my second question is how are bookings looking for Holy Week?

Speaker 2

Helane, the maintenance credit is something which is contained in a confidentiality agreement between Pratt and Whitney and Volaris. So I cannot give that many details on it. But having said that, Jaime explained where this accounts for, that's the first line on the P and L and that's that credit that you see there. And I think it's compensating the vast majority of our fixed costs, okay? And it's not covering full of that and it's not recovering the revenues that we're losing, okay?

Speaker 7

Right.

Speaker 2

It is difficult given the confidentiality agreement to give more details, but what we're planning is to give a forecast of our numbers, especially the CASM number and EBITDAR on a quarterly basis and we'll provide for the Q2 a guideline right at

Speaker 10

the beginning of the following quarter.

Speaker 11

Okay. That's very helpful. Thanks.

Speaker 8

And delaying

Speaker 4

booking curve for the spring break and the Easter high season. Just to remind everyone that Easter falls into the last week of March, so just as much as the Q1 and then most of it in the same April. And then I can tell you that the bookings for the 1st quarter looks solid.

Speaker 11

That's very helpful, Holger. Thank you very much.

Operator

Thank you, everybody. Thank you. Our next question comes from the line of Bruno Amorim of Goldman Sachs. Your question please, Bruno.

Speaker 12

Yes. Good morning, everybody. So I have two questions. The first one is a follow-up on margins. You delivered 31% in the 4th quarter.

Speaker 12

If we adjust for seasonality, this implies on a run rate on an annualized basis of around 28%. And you are guiding for 31% to 33% this year. So you are implying an improvement between the Q4 of last year and what you expect for the full year 20 24. Can you help us understand where the improvement comes from? Is it better pricing more than offsetting less fixed cost dilution or something else?

Speaker 12

And the second question, you have alluded to that to a certain extent. But can you clarify in terms of point of sale roughly how much of sales do you expect to come from the U. S. Vis a vis Mexico? You mentioned at some point international versus domestic routes, the breakdown of revenues from that perspective.

Speaker 12

But it will be interesting to hear from you, where do you expect for the breakdown in terms of points of sale will land with this new configuration of the network more tilted towards international? Thank you.

Speaker 4

Okay. So I'll start out with answering your question from the revenue perspective. Clearly, this year, we are seeing an improved unit revenue that is driven by the solid demand we see in the domestic market and international market despite the reduction in capacity. We're seeing also a very solid fare environment, and we are pushing ancillary revenues further. So it comes the unit revenue improvement comes from load, fares and ancillaries in 2024.

Speaker 4

And obviously, we right sized our network and we shifted the capacity into the most profitable markets as Enrique already mentioned. In terms of point of sale, the AFM split that we expect to towards the end

Speaker 3

of the year is going

Speaker 4

to be 40five-fifty 5. And then if you look at U. S. Dollar collections and point of sale, it's actually more balanced. It's going to be somewhere around fifty-fifty.

Speaker 4

And that should result in an EBITDA margin guidance that we gave you for the full year of 31% to 33% for 2024, and that's from the revenue perspective.

Speaker 8

Thank you.

Operator

Thank you. Our next question comes from the line of Pablo Ricorde of Santander. Please go ahead, Pablo.

Speaker 1

Hi, good morning. I don't know if you can hear me.

Speaker 8

Yes, we can.

Speaker 1

Thanks. Have a question on labor. What are you seeing in terms of labor increases for your operations in Mexico?

Speaker 2

So as I stated it in my presentation, the company was able to close a negotiation with the union with a base salary increase for the year of 5%.

Speaker 1

Thanks.

Operator

You're welcome. Thank you.

Speaker 13

Stand by for our next question.

Operator

Our next question comes from the line of Neil Glynn of Eric Taylor. Your question please Neil.

Speaker 12

Hi, good morning. If I could ask two questions please. The first one just following on from the last question on labor. You're obviously reducing capacity 16% to 18% and headcount came down in the Q4, I think you mentioned. Can you confirm what kind of magnitude headcount should fall in 2024 versus 2023 in the context of that capacity cut?

Speaker 12

And then the second question, ancillaries have clearly been a big focus within this call. Can you give us a sense today how much higher international routes are relative to domestic in terms of the ancillary proportion of total revenue. I guess if the total is 49% across the overall network, you must be maybe hitting 60% or so on international routes? Thank you.

Speaker 2

So answering your first question, it's going to be a little bit higher than what it was last year. There's two reasons for that. The first one is because the variable of the variable capacity that we have during the year, Sometimes we go up and sometimes we go down in terms of the aircrafts that we are sending or putting down because of the anticipated revisions. And then it's going to be a little bit higher also because in terms of technical professionals, we need to continue preparing people and we have this growth for next year or we need to be prepared to some growth during next year and especially the following year. So we preserve the technical capacity.

Speaker 2

That's why it's going to be maybe 1% higher, 1.5% higher than what we had last year. Referring to the second question, Holger will answer you.

Speaker 4

Yes. So clearly, the international portion in the ancillary pieces is higher than the domestic portion, mostly driven by higher bag revenues and things like seat assignments for the longer stage length itineraries. We don't provide the exact breakdown, but I can tell you that the U. S. And international portion is higher than domestic.

Speaker 4

And thus, the ancillary percentage of the total for the 2024 will be helped by a shift of capacity to international itineraries.

Speaker 12

Great. Thank you.

Operator

Thank you. Excuse me. This concludes today's question and answer session. I would like to invite Mr. Beltranena to proceed with his closing remarks.

Operator

Please go ahead, sir.

Speaker 2

Thank you, operator. Thank you, everyone. Like the past several months, the year ahead will be challenging and rewarding. I want to thank you, our family of ambassadors, the Board of Directors, our investors, the bankers, the lessors and suppliers for their unwavering support and commitment to Volaris. I look forward to addressing you all next quarter and seeing you in the following conferences during the next couple of months.

Speaker 2

Thank you very much.

Operator

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

Powered by Quartr
Earnings Conference Call
Controladora Vuela Compañía de Aviación Q4 2023
00:00 / 00:00