Controladora Vuela Compañía de Aviación, S.A.B. de C.V. (NYSE:VLRS) Q1 2024 Earnings Call Transcript April 23, 2024
Controladora Vuela Compañía de Aviación, S.A.B. de C.V. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, everyone. Thank you for standing by. Welcome to the Volaris First Quarter 2024 Financial Results Conference Call. All lines are in a listen-only mode. Following the company’s presentation, we will open the call for your questions. Please note that we are recording this event. This event is also being broadcast via live webcast and can be accessed through the Volaris website. At this point, I would like to turn the call over to Ricardo Martinez, Investor Relations Director. Please go ahead, Ricardo.
Ricardo Martinez: Good morning, and thank you for joining the call. With us is our President and CEO, Enrique Beltranena; our Airline Executive Vice President, Holger Blankenstein and our Chief Financial Officer, Jaime Pous. They will be discussing the company’s first quarter 2024 results. Afterwards, we will move on to your questions. Please note that, this call is for investors and analysts only. Before we begin, please remember that, this call may include forward-looking statements within the meaning of applicable securities laws. Forward-looking statements are subject to several factors that could cause the company’s results to differ materially from expectations as described in the company’s filings with the United States’ SEC and the Mexico CMDV.
These statements speak only as of the date they are made and Volaris undertakes no obligation to update or modify any forward-looking statements. As in our earnings press release, our numbers are in U.S. dollars, compared to the first quarter of 2023 unless otherwise noted. With that, I will turn the call over to Enrique.
Enrique Javier Beltranena Mejicano: Good morning, everyone and thank you for joining us today. I am proud to start by saying our Volaris team delivered strong first quarter results. It was certainly a challenging quarter, as we ramped up the engine accelerated inspection processes that drove challenges in delivering a good schedule, but I’m proud that, the team was able to execute on our plans so well. Over the last six months, our primary focus has been directing operations to enhance our customer service, managing ongoing changes to the schedule, as the fleet plan changes and continuing our emphasis on obsessive cost control. Despite the ongoing challenges with engine and aircraft issues, we continue to execute well and remain focused on delivering shareholder value.
During the first quarter, we undertook preventive accelerating inspections, resulting in the grounding of approximately 60 engines, for which we received pre-arranged compensation from Pratt & Whitney. We’ll continue to look for ways to mitigate the impact of these engine removals and we’ll continue to work closely with Pratt to accelerate the required work on the new engines. However, despite Pratt & Whitney’s optimistic discuss on enhancing MRO capacity and availability of materials and spare parts, Volaris remains skeptical about tangible progress in these areas. While engine removals to-date have gone accordingly to schedule, an aircraft on ground during the quarter were consistent with the plan, we are being conservative in our expectations for when engines will return into service.
Even with all this complexity, we have been able to drive strong results through nimble planning, a flexible network and our ability to make rapid strategic adjustments, we generated a strong increase in TRASM and ancillaries while cost remained controlled. As a result, we achieved net profitability in the first quarter, posting a $33 million net income. This marks a significant achievement as historically due to seasonality, our first quarter has resulted in net losses. The last time we recorded a net profit in the first quarter was back in 2019. As we execute our strategy, we continue to prioritize profitability when allocating capacity. On last quarter’s call, we outlined three core pillars for navigating the current environment. One, protecting our fleet and capacity.
Two, optimizing our network and driving profitability and three, elevating the passenger experience and cultivating talent for our future growth. Volaris continues to deliver against each of these pillars and our strategy has proven effective and is bearing fruit. Now let’s review how we closed the quarter. Total operating revenue grew 5%, with unit revenue rising 21%. Our ASMs contracted 13% due to engine accelerated inspections, which was better than our prior guidance of 16% to 18%. This improvement of our guidance is mainly driven by the timing of aircraft deliveries. EBIT and EBITDAR margins were 14% and 31%, respectively, expanding by 18% and 14% percentage points as compared to the prior year, respectively, and ahead of our expectations.
As capacity returns to our fleet, we are committed to being prudent and rational with our growth. Again, prioritizing profitability. Based on current planning for engine shop visits, we expect to fully recover 2023 capacity levels by the end of 2025. In the first quarter, we have received two new A321neos from Airbus ahead of schedule, both of which had engines with full life engine disks. The timing of this additional capacity enable us to incrementally capture robust demand from Mexico’s Holy Week and Easter. With the rationalization of Mexican capacity and the restoration of FAA Category 1 status, we have implemented a completely new base schedule that delivers a more consistent and reliable itinerary. The changes to the network were necessary, given we had to reduce operations at Mexico City International Airport to 43 slots per hour and we needed to develop better recovery in the schedule, given ongoing engine challenges.
Additionally, we reallocated significant capacity from the Mexican domestic market to U.S.-Mexico routes, while preserving our position in core domestic markets. This strategy shift enables us to prioritize routes that should have stronger unit revenues, while managing a network with reduced ASMs and no growth. In addition, we are working to reactivate and grow our culture with Frontier, which will drive incremental market opportunities, but we don’t expect to see any impact until late summer. Overall, we’re pleased with our business performance. At this capacity levels, despite increased unit costs due to reduced ASMs. Our team will remain focused on executing our operational plans. We will continue to focus on managing capacity, driving unit revenues, delivering margin expansion, strict cost control, being conservative with debt and achieving results that are inline with our guidance.
For years, we have been discussing building an airline with cost discipline, the ability to execute as planned and the flexibility to adjust as needed. Today, Volaris is delivering results and we are confident, we can continue to do so in a consistent basis. With that, I’ll now turn the call over to Holger to discuss the quarter’s commercial trends and operating performance.
Holger Blankenstein: Thank you, and good morning. In the first quarter, Volaris experienced robust demand, especially in the domestic market, with March showing significant outperformance. Although, we expected some traffic shift from the second quarter, given that Easter occurred in the final week of March, we are also happy with last-minute bookings. Our capacity reduction was less-than-expected at around minus 13% instead of the guided minus 16% to minus 18%. This was because Airbus delivered two new A321 neos earlier-than-planned. Additionally, high aircraft utilization also boosted ASMs per departure for the quarter. This additional capacity enabled us to meet demand and dilute fixed costs. Regarding network breakdown, ASMs were 27% lower in the domestic market and we increased capacity by 17% in the international market, resulting in a network-wide ASM decline of minus 13%.
Taking advantage of the restoration of FAA Category 1, we continue to reallocate capacity to northbound routes, which are undergoing a maturity process in preparation for the peak summer season, while simultaneously rightsizing our domestic core markets. Therefore, the international load factor dropped four points to 82% and the domestic markets load factor was strong at 91%, up six points over the prior year period for a healthy load factor result of 87% for the overall network. During the remainder of 2024, we will be cautious and will not introduce too much capacity to any individual route. While the earlier-than-expected arrival of the two A321 neos provides incremental ASMs for the full year, we still expect a capacity reduction of 16% to 18% for 2024 and we are trending toward the upper end of that range.
We are closer to minus 16% change versus 2023. Meanwhile, we continue to redeploy significant capacity into the U.S. market and we expect it will constitute around 45% of our network this year, compared to roughly 30% historically. We are currently in ramp up phase of much of this additional capacity, but continue to see progress in attractive markets like Los Angeles, the Bay Area, Chicago and Texas. In Central America, we are reducing the number of aircraft allocated to the market from nine to six due to our lack of aircraft availability. TRASM improved to 9.3% up 21%. This result was primarily driven by a focus on serving the most profitable routes in the domestic market, reducing capacity in underperforming routes and by robust growth in ancillary.
International TRASM remained solid despite a 17% capacity increase. As customers increasingly embrace the Volaris Ultra Low-Cost Model, they are more frequently purchasing ancillary services. Total ancillaries per pack rose to a historically high record of $57 from the previous record of $55 for the fourth quarter of 2023. In the first quarter, ancillary revenues represented 51% of total operating revenues, inline with our goal of having them represent half of total operating revenues. These ancillary purchasing patterns are promising, as we simultaneously see strong base fare trends. Our average base fare stood at $54, reflecting a 15% increase. On recurring revenue, our goal is to build V Club membership to compose about a third of our total sales in the medium-term.
Additionally, in the near-term, we expect to promote greater affinity with our core customers, as we refine the Volaris mobile app and other digital assets, which will catalyze higher direct sales, better product customization, booking flexibility and more options for our customers. Passenger satisfaction is crucial to our success. Volaris achieved a net promoter score of 32% in the first quarter, a positive result despite recent engine-related route reductions and cancellations. Our customer service team is working hard to communicate with passengers and reschedule bookings, while our operation team is performing well under the circumstances. On time performance for the quarter was 82.8% with a scheduled completion of 99.3% and utilization of 5.2 segments per aircraft per day.
I want to reiterate our focus on good labor relations. We successfully agreed the 2024 Union Agreement, a key enabler of widening our cost advantage versus North American U.S. cities and legacy U.S. airlines. Maintaining strong labor relations and a stable work force, even during periods of industry disruption is essential to our operations and financial strategy and positioning our business for long-term growth. Looking forward, we have noted the reduced demand for April as Easter was celebrated in the first quarter. That said, we are observing healthy spring and summer booking trends. We are closely monitoring pricing and load factors to optimize yield. Our forecast indicates a further increase in second quarter bookings, as we enter the peak season.
It is important to note that, while we are experiencing strong demand and positive travel trends, particularly in the domestic market, we are also navigating the challenges caused by the accelerated engine inspection process, while managing our capacity. In summary, we are well positioned for a positive 2024, driven by cost discipline, improved TRASM through better fares, strong ancillary performance, increased loads and our robust network. This upward trajectory, which started in the fourth quarter of 2023, is already evident. Booking trends indicate continued favorable performance in the months ahead, aligning with our 2024 guidance. I will now turn the call over to Jaime to discuss our financial performance.
Jaime Esteban Pous Fernandez: Thank you, Holger. Positive TRASM trends and strict cost control define our first quarter 2024 financial results. When combined with solid traffic, Pratt & Whitney compensation and diligent execution, we generated net profitability in the quarter. This is a notable accomplishment for the first quarter, as historically first quarters due to seasonality have resulted in net loss. This first quarter results encourage us to revise upward our full-year 2024 guidance. However, our execution plan for the year remains aligned with our initial outlook. I will provide a more detailed discussion of our updated guidance shortly. Let me start by walking through our performance in the first quarter of 2024, compared to the same period last year.
Total operating revenues were $768 million, a 5% increase notwithstanding the 13% year-over-year reduction in capacity, due to the strong demand and total revenue per packs improvement. CASM-ex fuel result came in better than guidance at $0.0516 an increase of 11% against the first quarter of last year. The improvement was driven by the remeasurement of previously-booked redelivery accruals, which reflect nine lease extensions for aircraft for yearly due for delivery in 2025 and 2026. Nonetheless, as discussed in our previous call, there was substantial cost pressure from the engine-related AOEs and the effect of a larger proportion of international capacity, particularly with higher landing and navigation fees in the United States. We booked sale on leaseback gains of $9.7 million in the other operating income line and the remeasurement related to lease extensions generated a $41 million benefit in the aircraft variable lease expenses line.
Meanwhile, total CASM was relatively flat year-over-year at $8.08 due to lower fuel expenses in the period. Our average economic fuel cost fell by 13% to $3.01 per gallon. EBIT totaled $104 million compared to a $31 million loss in the first quarter of 2023. This reflected a stronger CRASM, the benefit from aircraft lease extensions and lower fuel costs, resulting in a margin of 14%, an 18% percentage point increase. EBITDA totaled $235 million, a 91% increase while EBITDA margin was 31%, an improvement of 13% percentage points. It is important to note that, both EBIT and EBITDAR include price compensation as well as expense from leases of the entire fleet including aircraft on ground. Net income rose year-over-year to $33 million, translating into earnings per ADS of $0.29.
The cash flow provided by operating activities in the Q1 was $245 million. The cash outflows used in investing and financing activities were $97 million and $171 million respectively. In the first quarter, our CapEx excluding fleet per delivery payments totaled $83 million primarily driven by acquiring additional spare engines. These investments are crucial for maintaining business continuity and minimizing disruption to our core operations. As a result, we now expect capital expenditures to be $400 million for full year 2024 versus an original CapEx forecast of $300 million. Volaris ended the quarter with a total liquidity position of $768 million, representing 23% of the last 12 months total operating revenues. Our net debt-to-EBITDA ratio decreased to 3.1 times from 3.8 times at the end of the first quarter of 2023 and 3.3 times at year end of 2023.
We expect to further deleverage by the end of the year. Volaris has low and manual refinancing exposures in the short to medium-term. Most of our financial debts short-term maturities are associated with pre-delivery payments thus not posing a refinancing risk, given that we have already signed signal leasebacks for the aircraft that will be delivered over the next 18 months. We continue to be conservative with our balance sheet. As of March 31st, our fleet consisted of 134 aircraft, up from 129 aircraft at the end of the year. Fleet per departure were 197 and our fleet had an average age of 5.9 years. We confirm our medium-term aircraft deliveries scheduled with Airbus and expect 21 additional aircraft deliveries by the end of 2025 all with PDP financing and single leaseback commitments.
Turning now to guidance, we are pleased with our first quarter results and market trends continue encouraging. However, industry conditions remain fluid. While we acknowledge macroeconomic and geopolitical uncertainties, we are cautiously optimistic about the year. For the second quarter of 2024, we expect an ASM reduction of approximately 18% year-over-year, TRASM of $9.1 to $9.2 CASM-ex to be fuel to range of $5.5 to $5.6. Please note that primary cost of the CASM-ex fuel increase is the capacity reduction and the specific fixed cost linked to the grounded fleet, which are not fully compensated by Pratt & Whitney. Finally, we expect an EBITDA margin between 31% and 33%. For the full year 2024, our latest guidance is as follows. We continue to expect an ASM reduction of 16% to 18% year-over-year, EBITDA margin in the range of 32% to 34%, compared to our initial outlook of 31% to 33%, given enhanced profitability in the first quarter.
CapEx net of finance fleet delivery payments of $400 million, driven by our purchases of spare engines. Our second quarter and full year 2024 outlook assumes an average exchange rate of 17.30 to 17.50 Mexican peso per US dollar and an average U.S. Gulf Coast jet fuel price of $2.60 to $2.70 per gallon. We will continue to make decision appropriate to increase profitability, preserve business continuity and create shareholder value. Now I will turn the call back to Enrique for closing remarks.
Enrique Javier Beltranena Mejicano: Thank you, Jaime. In sum, we will continue to execute and deliver on every facet of our plan as we move through 2024. We will remain flexible adjusting for volatility and capitalizing on opportunities as necessary to drive profitability. Before proceeding to the Q&A session, I’d like to highlight the upcoming significant political campaign in Mexico over the next few months. While we anticipate minimal changes to aviation policies, the primary uncertainty will revolve around the development of aviation policies for managing metropolitan area airports. Thank you very much for listening. Operator, please open the line for questions.
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