Controladora Vuela Compañía de Aviación Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 23, 2024

There are 12 speakers on the call.

Operator

Good morning, everyone. Thank you for standing by. Welcome to Volaris Second Quarter 2024 Financial Results Conference Call. Questions. This event is also being broadcast live via webcast and can be accessed through the Volaris Web site.

Operator

At this point, I would now like to turn the call over to Ricardo Martinez, Investor Relations Director. Please go ahead, Ricardo.

Speaker 1

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 Paus. They will be discussing the company's Q2 2024 results. Afterward, we will move on to your questions. Please note that this call is for investors and analysts only.

Speaker 1

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 Mexico's CNBB. These statements speak only as of the day they are made, and Volaris undertakes no obligation to update or modify any forward looking statement. As in our earnings press release, our numbers are in U. S.

Speaker 1

Dollars compared to the Q2 of 2023 unless otherwise noted. And with that, I will turn the call over

Speaker 2

to Enrique. Good morning, everyone, and thank you for joining us. Volaris continues to perform positively, recording our highest absolute EBITDAR for the 2nd quarter. This achievement is notable given that we have been managing a capacity reduction driven by accelerated engine inspections for nearly 1 year, which has grounded approximately 1 fourth of our fleet. Our unwavering focus on execution has enabled us to deliver strong results during this period of disruption.

Speaker 2

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 Q3. 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 GTS, after meeting with Pratt and Whitney recently, I can provide 3 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 and Whitney have successfully coordinated slot spare parts and materials with high certainty for the next 180 days.

Speaker 2

As a result, better turnaround times are forecasted for our engines during this period. Nonetheless, Pratt and Whitney is currently at its highest volume and most critical point of engine inspections. 2nd, powder metal has been a major focus for Pratt and Whitney and they are starting to recover by ramping up material availability and MRO capacity. 3rd, I was seriously impressed by Pratt and Whitney and International Aero Engines $850,000,000 investment in the new shop and part production facility in Asheville, North Carolina. This facility has started operations that will continue to increase production over the next 18 months.

Speaker 2

I acknowledge the efforts Pratt and Whitney and international arrangements are making and they're supporting overcoming this situation. While I'm more positive, it is important to recognize that the engines time on wing remains a real challenge. If you take one thing away from today's call moving forward, it is this, as grounded aircraft return to our productive fleet, we are committed to proven and rational growth prioritizing profitability. Importantly, we expect recent unit revenue levels to remain resilient as Volaris' capacity gradually returns. By shifting ASMs into the cross border market, our TRASM strength reflects a well balanced market mix aimed at maximizing profitability.

Speaker 2

Volaris' position as an ultra low cost carrier in Mexico differs in many ways from ultra low cost carriers in the U. S. We are the largest airline in Mexico by passengers, which gives us a strong relative domestic market share and cost leadership of our legacy carriers. Additionally, Mexico has a unique capacity to convert both passengers, which has driven growth in the country's emerging air travel market in the last 15 years. Our success is not only due to our profound ultra low cost pricing and ancillary strategies, but also the quality of our service, our ability to encourage repeat travel and the loyalty of our visiting friends and relative passengers.

Speaker 2

Finally, we have maintained a significant advantage over the U. S. Industry through dramatic cost control, avoiding expensive short term wet leases and sustaining our efficient cost structure with approximately 70% of our cost being higher. With that, I will now turn the call over to Holger to discuss commercial and operating performance for the quarter.

Speaker 3

Thank you, and good morning. Reflecting on the first half of twenty twenty four, 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' 2nd quarter operational results. During the quarter, we generated TRASM of €0.889 a 12% increase year over year and a load factor of 85.5% compared to 84.6% a year ago.

Speaker 3

Despite 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 0 fare accounts for over 15% of our sales. And our annual pass offering is performing well.

Speaker 3

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 Q2 was 85.6 percent, with on time departures rising 8 points over our performance in the 2nd 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.

Speaker 3

In the Mexican market, we have observed strong demand resulting in robust revenue per passenger and load factors above 90%. In the U. S, our increased capacity is bolstering consolidated unit revenue and profitability, supported by structurally higher fares and ancillary pricing. The cross border capacity we have added over the past year has continued to ramp up with July load factors and fares showing solid improvement. Despite the schedule impacts related to Pratt and Whitney engines, we were diligent in managing accommodations and, as a result, have not experienced a significant number of customer complaints.

Speaker 3

We are seeing the result in an improved Net Promoter Score of above 40%. Going forward, as we move into the seasonally stronger second half, our bookings indicate ongoing robust performance. Trends for the summer high season are slightly above our already strong expectations in all markets, and we anticipate close in bookings will remain healthy. A key driver of low cost customer service is delivering the Volaris promise: friendly service, self-service solutions, high schedule completion, good on time performance and optional ancillaries. Therefore, we are investing heavily in better self-service solutions on the day of travel with a completely new mobile app.

Speaker 3

And on the scheduling side, during the Q2, Volaris implemented an evolution of its itinerary. This schedule prioritizes stability, featuring a new base schedule where aircraft are fixed to core routes, while other aircraft remain flexible across the network. This approach has immediately improved reliability and led to fewer cancellations. I want to reiterate the point that we will exercise careful control in restoring our network's capacity over the next few years. The impact of the accelerated inspections will persist through at least 2026, and we do not expect to reach 2023 capacity levels next year.

Speaker 3

Additionally, as we bring back capacity, we now have more options within our network, including the Mexico U. S. Transborder market, while also monitoring opportunities to strengthen the domestic network and Central America. Now I would like to revisit Enrique's comment about dedicating ourselves to profitable growth and how Volaris differs in many ways from ultra low cost carriers in the U. S.

Speaker 3

Over the past decade, we have accelerated growth to scale up our markets and become Mexico's leading airline. With our brand and network established, we are putting our leadership and differentiation to work to drive profitability. No U. S. Operator has the level of market share equivalent to our penetration in the Mexican domestic market, and no Latin American LCC has our U.

Speaker 3

S. Footprint. We have a more balanced network between Mexico and the U. S. With the return of Category 1.

Speaker 3

We now have 2 significant markets at our disposal to grow capacity. Unlike recent years when Category 2 forced us to allocate additional capacity to the domestic market, resulting in an oversupplied market. We now have a stable, competitive domestic market with rational players. Domestically, being low cost means we can keep fares low on a sustainable basis, building affinity and recurrent flying in our core markets while stimulating demand from bus switchers in less developed markets. In the U.

Speaker 3

S. Cross border markets, where we expect travel to increase over the next decade due to near shoring investments, low cost means we can price at levels that our U. S. Competitors cannot match. Additionally, we primarily serve the resilient VFR markets where we have a competitive advantage with large Hispanic communities like Chicago, Denver, Houston, Los Angeles and Oakland.

Speaker 3

Further, the reactivation of our codeshare with Frontier, which historically contributed 2 percentage points of additional international load factors, is expected to be a tailwind going forward. Finally, consistent ancillary penetration will be a further differentiator, and we are continuing to evolve our offerings. Unbundling services allow passengers to customize their travel experience and reduce base fares, which is ideally suited for a high growth emerging aviation market. We are also tailoring our ancillary offering more and more to our different customer segments. For example, we have a business ancillary combo or we are offering free changes to our higher fare combos.

Speaker 3

I will now turn the call over to Jaime to walk through our 2nd quarter financial performance. Thank you, Holger. Our Q2 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 EBITDA for a second quarter and met market expectations and guidance. As the top line drivers for these results were already covered, I will concentrate my comments on cost, cash flow and balance sheet.

Speaker 3

Compared to the same period last year, our Q2 2024 results are total operating revenues decreased only 7 percent to $726,000,000,000 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 $0.08 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 cost being viable, we ensure our competitive advantage. In fact, we believe our cost gap compared to U.

Speaker 3

S. Peers will continue to widen over time in the cross border market. A key principle of our network shift to the U. S. Is to increase our cash collection in U.

Speaker 3

S. Dollars and protect our P and L from foreign exchange volatility between our top and bottom lines. We estimate that around 45% of our revenue collections will be in U. S. Dollars with a target of 90% of our cash balance held also in U.

Speaker 3

S. Dollars. We book sale and leaseback gains of $6,700,000 in the other operating income line related to the delivery of 2A321neo aligned with our long term strategy of preserving the lowest rental costs throughout the life of our leases. Note that this line includes most of parts and Whitney's aircraft grounding compensation. EBIT increased 29%, totaling 66,000,000 with an EBIT margin of 9.1 percent, up 2.6 percentage points.

Speaker 3

EBITDA came in at $261,000,000 a 23% increase, while EBITDAR margin was 36%, an improvement of 8.8 percentage points. These results reflect strong unit revenues and efficient cost control. As a reminder, both EBIT and EBITDA include part time with this compensation as well as expenses from leases of the entire fleet included aircraft on ground. Net income rose to 10,000,000 dollars translating to earnings per ADS of $0.09 Cash flow provided by operating activities in the 2nd quarter was $304,000,000 Cash outflows used in investing and financing activities were $141,000,000 $149,000,000 respectively. Meanwhile, our 2nd quarter CapEx, excluding finance fleet pre delivery payments, totaled CAD97 1,000,000 primarily driven by the acquisition of Esperanids.

Speaker 3

These investments are crucial for maintaining business continuity and mitigating disruptions to our core operations. Volaris ended the quarter with a total liquidity position of 758,000,000 dollars representing 23% of the last 12 months total operating revenues. As of June 30, our net debt to EBITDA ratio decreased to 2.9 times from 3.3 times at the end of 2023 and from 3.1x at the end of the Q1 of 2024, we expect to continue to deleverage throughout the second half of the year. Now looking at our first half of twenty twenty four results compared to the same period of 2023, Total operating revenues were CAD1.5 billion nearly flat against last year despite flying 15% fewer ASMs. CASM was $0.08 a 4.8% increase.

Speaker 3

Average economic fuel cost fell by 4.5 percent to $0.0993 per gallon, while CASM ex fuel was $0.0525 10.8 percent higher. As discussed in our prior calls, this unit cost increase is primarily due to the engine related aircraft roundings. EBIT was $107,000,000 up from $20,000,000 in 2023 and EBIT margin was 11.4%, up 10.1 percentage points. At the bottom line, we recorded a $44,000,000 net profit compared to a $65,000,000 net loss a year ago, translated into earnings per ADS of $0.38 In the 3rd year to date totaled $496,000,000 a 48% increase with an EBITDA margin of 33%, an increase of 11.1 percentage points. As of June 30, our fleet consisted of 136 aircraft, up from 123 a year ago.

Speaker 3

During the quarter, we had an average of 31 aircraft on ground to the engine inspections. We received 2 new A321neo aircraft during the 2nd quarter for a total of 5 new aircraft year to date from our order book with Airbus plus 2 A320ceos on their straight operating leases as part of our mitigation plan for the engine inspection. Note that the next 30 aircraft deliveries from our order book have PDP financing including our financing for these PDPs we have no significant near or medium term debt liabilities. Our CapEx, net of finance PDPs for the first half of twenty twenty four totaled $180,000,000 in line with our expectations. Finally, turning to guidance.

Speaker 3

Year to date, our unit revenues, margin expansion and overall performance have met our goals. While we anticipate continued commercial strength, we are also mindful of industry supply chain disruptions and other uncertainties. However, we are confident in our ability to mitigate industry disruption and continue meeting guidance in the second half. Therefore, in addition to the ASM update discussed earlier, we are maintaining our overall guidance. For the Q3 of 2024, we expect an ASM reduction of approximately 14% year over year, TRASM of around $0.093 CASM ex fuel of approximately $0.056 Finally, we expect an EBITDA margin of around 33%.

Speaker 3

Our Q3 2024 outlook assumes an average exchange rate of MXN8.4 to MXN8.6 per U. S. Dollar and an average U. S. Gulf Coast spud jet fuel price of MXN2.6 to MXN2.7 per gallon.

Speaker 3

For the full year of 2024, our latest guidance is as follows. We now expect an ASM reduction of around 40% year over year driven by the deployment of recently acquired spare engines and other mitigation initiatives. We continue to expect an EBITDA margin of 32% to 34%, notwithstanding the adjustment in our FX assumption. And finally, CapEx net to finance fleet pre delivery payments of $400,000,000 driven by our purchases of Esperance and unchanged from our prior outlook. Our full year 2024 outlook assumes an average exchange rate of COP 17.8 to COP 18 per U.

Speaker 3

S. Dollar and an average U. S. Gulf Coast spot jet fuel price of MXN2.6 to MXN2.7 per gallon. Now I will turn the call back over to Enrique for closing remarks.

Speaker 2

Thank you, Jaime. Over the past 2 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 served consumer demand for air travel well, driving a sustained growth rate of approximately 3 times that of national GDP. As U.

Speaker 2

S. 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.

Speaker 2

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.

Operator

Thank you. The floor is now open for questions. 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. To send your questions via the webcast platform, click on the Ask a Question button and type your inquiry.

Speaker 4

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?

Speaker 4

Your commentary about July sounds pretty encouraging. I just wanted to kind of put that in context.

Speaker 3

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 seasons. The summer season July August is a case in point and we are very encouraged with July trends that are currently trending above our expectations.

Speaker 4

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, I assume you have to get some engines back before you can actually measure the throughput or how that throughput might be changing.

Speaker 4

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?

Speaker 2

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 days 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.

Speaker 5

And this is Jaime, Duane. And Arino 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 B2500, which are also included in that second half capacity adjustment favoring Molaris ASM production.

Speaker 2

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

Speaker 4

Appreciate that. Obviously, a lot of moving parts, but I guess just in terms of so you can measure the throughput, so we can measure the throughput. How many do you expect to get back in the Q3 Q4, if you're willing to share that?

Speaker 2

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

Speaker 4

In the back half of this year?

Speaker 2

In the second half of this year.

Speaker 5

But remember then, what happens is the engines come back, but new engines go out. So net net, you should be thinking in ASMs, not in engines back or aircraft back. Josh, info on the first half of the year, we have averaged 29 planes from the 1st Q, 31 planes in the 2nd Q. And that number will increase probably to 34, 35 during the 3rd Q and the 4Q 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 goes.

Speaker 5

It's really complicated to follow by engines and it's better just to look at ASM production.

Speaker 4

Okay. Appreciate that detail. Thank you.

Operator

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

Speaker 6

The first, if I may, trying to have 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 1 of the lessors recently. Is that something that you guys would consider? Or is you don't see yourselves going that way? Thank you.

Speaker 2

The answer is no. Right now, no. Okay. And I don't think in the next 3, 4 months, it's going to be the case. Clearly, the problem of doing aircraft crew maintenance and insurance leasing has an impact on cost first.

Speaker 2

The second thing is if we add capacity that way, we will be deteriorating the impact that we had 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're playing here for profitability, not for market share.

Speaker 5

And in terms of engines, Steve, this is Jaime. Most of the additional engines are purchase engines, not these 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.

Speaker 6

Okay. Really appreciate that Enrique and I mean very helpful. And just one quick follow-up. I'm 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?

Speaker 3

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 Q4.

Speaker 6

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

Speaker 3

It's a start of operations. So it's still quite a way off.

Speaker 6

Perfect. I may have heard you. I appreciate that, Holger. Thank you.

Operator

Thank you. One moment for our next question.

Speaker 7

Our next question comes from

Operator

the line of Michael Linenberg from Deutsche Bank.

Speaker 8

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 Q4, 3rd, Q4 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?

Speaker 3

So there's obviously a lot of uncertainty around the original equipment manufacturers both Airbus Pratt and Whitney. We currently expect to see the peak of aircraft on ground in the Q3 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 U. S.

Speaker 3

Market. So it's going to be a gradual return to service and cautious capacity growth.

Speaker 8

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 U. S. Transporter market.

Speaker 8

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 the gap. I think that gap is narrowing with your additional service. Thanks for taking my question.

Speaker 5

That's correct, Michael. This is Jaime. Around 2 third of the cost are in U. S. Dollars.

Speaker 5

And right now, we're aiming to be 45% by the area of collections. So that gap is narrowing.

Speaker 8

Great. Thank you.

Speaker 2

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 U. S. 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.

Speaker 8

Very good. Thanks Enrique.

Operator

Thank you. One moment for our next question.

Speaker 7

Our next question comes from the

Operator

line of Joao Frizzel from Goldman Sachs.

Speaker 9

Hey, good morning guys. Thanks for taking my question. I just have a quick question on the guidance for the Q3. As you guys mentioned in your previous remarks, second half of the year is only stronger, right, visavis the first half. So the 32% EBITDA margin in 3rd quarter implied on a significant deceleration from the 36%, 37% you guys delivered on the 2nd quarter.

Speaker 9

So I'm just trying to understand to what factors you guys attribute this weaker margin environment? Thank you very much.

Speaker 3

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 3rd quarter specifically and 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 U.

Speaker 3

S. 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 1 point higher in EBITDA margin versus the guidance.

Speaker 3

So that shows you how sensitive our guidance is to or our EBITDA is to the macroeconomic variables. I also mentioned that this quarter, the Q3 is going to be the peak in terms of aircraft on ground due to the Pratt and 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.

Speaker 9

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

Operator

Thank you. One moment for our next question.

Speaker 7

Our next question comes from

Operator

the line of Tom Fitzgerald from TD Cowen.

Speaker 10

Hi, everyone. Thanks very much for the time. Would you mind 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?

Speaker 3

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.

Speaker 3

So everybody that buys the lowest fare class gets a V club membership and then has the opportunity to buy 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 are clearly focused on building affinity and repeat customers through these affinity programs.

Speaker 10

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?

Speaker 10

And could that be accelerated by some of the supply chain near shoring happening in Mexico once again?

Speaker 2

I think that's a difficult question to answer because it depends also 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 5 years.

Operator

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

Speaker 11

Yes, hello. Thank you for taking my question. And congrats on the good results facing those child infiltration with the groundings. I just wanted to ask for retailers what you already mentioned. So it seems that your TRASM guidance of 9.3 percent based on what you're seeing in July might be conservative.

Speaker 11

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? But beyond that, is there anything else we need to consider? No, for example, maintenance costs, we saw that they decreased quite significantly in the Q2 after being high in the Q2. At what level should we assume a normalization there for the rest of the year?

Speaker 5

Yes, I will tackle the first question. This is Jaime, Jan. Talking about macros, the macros that we assume we did not get them, we use for FX the Bloomberg curve and for fuel the Platts. Looking at current macro, so 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.

Speaker 5

That's why we were able to reduce the CASM in the 1st and the second quarter. Next quarter, it also included the benefit of ASMs. But I love it 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.

Speaker 5

So we believe that, that guidance that we provide for the 3rd Q is what we expect. Obviously, if we have a better any opportunity to reduce customer, we will do it. Moreover, during the year, you can expect a customer of around 5.5 around for the full year.

Speaker 11

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 5.5% number you just mentioned?

Speaker 5

It's I think it's predictable because it's something that you program when 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 basics.

Speaker 11

Got it. All right. Thank you.

Speaker 5

You're welcome.

Operator

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.

Operator

Please go ahead, sir.

Speaker 2

Thank you, as always, to our family of ambassadors, to the Board of Directors, to our investors, bankers and resource 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.

Operator

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

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Key Takeaways

  • Volaris delivered its highest absolute EBITDAR in Q2 despite grounding roughly 25% of its fleet for engine inspections, driven by rigorous execution and cost control under its mitigation plan.
  • Full-year capacity reduction guidance was improved to about –14% year-over-year, as engine turnaround times are set to accelerate thanks to Pratt & Whitney’s coordinated spare parts, material ramp-up, and a new North Carolina facility.
  • Commercial performance remained strong with TRASM up 12% to $0.889, load factor at 85.5%, ancillary revenue per passenger rising 15% to $53, and V Club membership accounting for over 15% of sales.
  • Cost discipline boosted margins: Q2 CASM ex-fuel was $0.0533, economic fuel cost $2.86/gal, EBIT margin reached 9.1% (up 2.6pp), EBITDA margin 36% (up 8.8pp), and net debt/EBITDA fell to 2.9x.
  • Q3 guidance assumes a ~14% capacity cut, TRASM of ~$0.093, CASM ex-fuel ~$0.056 and ~33% EBITDA margin, while full-year outlook remains at ~40% capacity reduction, 32–34% EBITDA margin and $400 M net CapEx.
AI Generated. May Contain Errors.
Earnings Conference Call
Controladora Vuela Compañía de Aviación Q2 2024
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