Controladora Vuela Compañía de Aviación, S.A.B. de C.V. (NYSE:VLRS) Q4 2023 Earnings Call Transcript
Controladora Vuela Compañía de Aviación, S.A.B. de C.V. (NYSE:VLRS) Q4 2023 Earnings Call Transcript March 2, 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 Volaris' Fourth Quarter and Full-Year 2023 Financial Results Conference Call. All lines are in listen-only mode. Following the company's presentations, we will open the call for your questions. 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.
Ricardo Martinez: 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 Pous. They will be discussing the company's fourth quarter and full-year 2023 results. Afterward, we will move on to your questions. Please note that this call is for investors and analysts only. 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 CNBV.
These statements speak only as of the date they are made, and Volaris undertakes no obligation to update or modify any forward-looking statement. As in our earnings release, our numbers are in U.S. dollars, compared to the fourth quarter of 2022, unless otherwise noted. And with that, I will turn the call over to Enrique.
Enrique Javier Beltranena Mejicano: 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 fourth quarter. 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 $112 million. Our quarterly and full-year 2023 performance demonstrated resilience in the face of the challenge encountered throughout the years, such as the extended FAA downgrade of Mexico to CAT 2, aircraft on ground -- AOGs due to Pratt & Whitney preventive 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. Now, let's review how we closed the fourth quarter. Operating revenue grew 9.6% year-over-year, with unit revenue rising 10.7% on ASMs that contracted 1.1%. EBIT and EBITDAR margins expanded by 11 points and 6 points, respectively, versus the same period of 2022. I think it is important to emphasize the valuable lessons we learned during the fourth 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 outlook. 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 & Whitney. The agreement will help to address certain fixed costs associated with the 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. 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 to 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. Volaris' 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 resized 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 continued to re-accommodate our affected passengers. 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 the Mexican domestic market, we canceled routes in the ramp-up phase and adjusted frequencies on other saturated 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.
For 2024, we anticipate that on average, our network on an ASM basis will approximately 45% international, a notable increase from 35% in 2023, which will increase US dollar denominated revenues. We successfully boosted ancillary revenues to an all-time high, accounting for over 50% of total operating revenues in the fourth 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. 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 three core pillars. The pillar number one 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 requirements. Furthermore, we successfully negotiated the acquisition of additional spare engines. 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 the 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. Pillar number two, 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 CASM-ex. 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 VFR 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. 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 the lower ASMs expected to be the primary constraint on cost performance this year. Important to note that once the capacity is reinstated, our cost advantage will increase versus our competitors. Pillar number three, 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; offering 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. 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 fourth quarter operational performance and commercial plan for 2024.
Holger Blankenstein: 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 inspections leading to aircraft groundings. 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 fourth 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.
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 zero-fare ticket, continues to attract strongly, contributing to 15% of our ticket sales. 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 fourth quarter. 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 ASMs, highlighting demand remains especially strong in our core markets and stations. However, in the fourth quarter, we had to reduce domestic ASMs by 11.2% year-over-year, while growing international ASMs by 21.7% due to the accelerated inspections required by Pratt & Whitney. Our capacity focus was on adding frequencies to the U.S. transporter 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, we also addressed dilutions in the Central American market caused by the accelerated capacity we added last year.
Notably, fourth quarter TRASM increased to $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 average base share in the fourth 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 pax continue to be very strong, while we observe unit revenue pressures reported by our U.S. peers. Ancillary per pax reached $55 in the fourth 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 offerings this year include continuously optimizing pricing through personalized and advanced pricing strategies, launching new products and services, including insurance options 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 transporter traffic between Mexico and the U.S. demonstrates consistent growth propelled by the positive impact of nearshoring and the need for mobility.
We believe that any potential new restrictions to land border crossings will have no negative impact on our transporter air traffic. It is crucial to emphasize that the foundation of our traffic between the U.S. 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. 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 the 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. dollars in 2024, reducing foreign exchange exposure on our P&L. The positive trajectory extends further with the increasing adoptions of the ancillary offerings, particularly popular among passengers on extended journeys combined with improved domestic yield, attributed to lower industry capacity, we are poised for robust TRASM results in 2024. This encouraging trend, initiated in the fourth quarter 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. 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 products. Regarding the network, this year we will generate a more balanced ASM production with a split of around 55% in our Mexican domestic markets 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 downgrade to Category 2 in the past two years, which impeded us from fully capitalizing on this collaboration we are keen to revive our engagement this year and anticipate achieving significant outcomes. We are well positioned with our enhanced brand presence and greater distribution power. 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 codeshare 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 adjustments and a smaller footprint where markets are demonstrating sufficient capacity. In summary, we see the opportunity to have a positive 2024 by delivering on our ongoing commitments, increased TRASM through better fares, improved 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 markets. I will now turn the call over to Jaime to discuss our financial performance for the fourth quarter and full-year 2023.
Jaime Esteban Pous Fernandez: Thank you, Holger. We are pleased to report that despite the external challenges discussed earlier, our fourth quarter performance allows to turn an accumulated loss in the first nine months into a positive net income. Compared to the same period last year our fourth quarter 2023 results are, total operating revenues of $899 million, 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 fourth quarter, compensation from Pratt & Whitney is included in the P&L, mainly as part of the other operating income.
This accounting item 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 total $164 million, an increase of 173%, reflecting the improvement in TRASM, the benefit of aircraft lease extensions and favorable fuel cost. This resulted in a margin of 18 percentage points and 11 percentage points increase. EBITDAR totaled $281 million, a 35% increase. EBITDAR margin was 31%, an improvement of 6 percentage points. This is a significant shift from our performance in the first nine months of the year. Net income rose $212 million, translating into earnings per ADS of $0.96. The cash flow provided by operating activities in the fourth quarter was $218 million.
Cash outflows using investing and financing activities were $113 million and $82 million, respectively. Now moving to our full 2023 results. Our normal financial performance stands out compared to 2022. Total operating revenues of $3.3 billion, an increase of 14%; CASM of $0.0781, a 1.7% decrease over 2022. The average economic fuel cost for the full-year decreased by 18% to $3.11 per gallon. CASM-ex fuel of $0.0481, 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 groundings in the third quarter. EBIT was $223 million up from $44 million for 2022, with an EBIT margin of 7%, up 5.3 percentage points. EBITDAR came in at $823 million, an increase of 40%, while EBITDAR margin was 25%, an increase of 4.7 percentage points.
Net income was $8 million, translating into earnings per ADS of $0.07. Volaris finished the year with a total liquidity position of $789 million representing 24% of the last 12 months operating revenue. Our net debt-to-EBITDAR 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 predelivery payments, which [Indiscernible] 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 $252 million. As of December 31, our fleet comprised 129 aircraft, up from 117 aircraft a year ago, since the departure were 197 in the fourth 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 and 2025, all with PDP financing and sale and leaseback commitments. We are entering this year with important financial tailwinds that put us in a good position to meet our yearly goals. Therefore, our outlook continues as follow. For the first quarter of 2024, we expect ASM reduction of 16% to 18% year-over-year, TRASM of $0.085 to $0.087, CASM ex fuel in the range of $0.055 to $0.057. Please note the primary cost of CASM ex fuel increase is the capacity reduction and a specific fixed cost linked to the grounded fleet not fully compensated at Pratt's AOG relief.
And finally, we expect an EBITDAR margin of 25% to 27%. For the period this outlook assumes an average foreign exchange rate of MXN17 to MXN17.20 per U.S. 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, EBITDAR margin in the range of 31% to 33%, CapEx net of financed fleet predelivery payments of approximately $300 million. Our full-year 2024 outlook assumes an average exchange rate of MXN17.70 to MXN17.90 per U.S. dollar and an average economic fuel price of approximately $2.50 to $2.60 per gallon for the year. Now, I will turn the call over to Enrique for closing remarks.
Enrique Javier Beltranena Mejicano: Thank you very much, Jaime. Before we begin the Q&A session, I want to emphasize that Volaris is dedicated to our ambassadors and customer 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. In January, we hosted an event discussing the role of air transportation in preventing child and adolescent trafficking.
Additionally, in commemorating 10 years of Volaris joining ECPAT, 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 are 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. 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 codeshare with Frontier is not threatened.
Volaris' balance sheet is strong and our fleet plan is flexible. Our strategies have proven effective and resilient. These unprecedented market conditions represent an opportunity to shift our focus from establishing our industry profile to prioritizing profitability and shareholder returns. Moving forward, shareholder value creation remains as important to us as ever before. Thank you very much for listening. Operator, please open the line for questions.
Operator: Thank you. The floor is now open for questions. [Operator Instructions] Our first question comes from the line of Duane Pfennigwerth of Evercore ISI. Please go ahead, Duane.
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