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Edited Transcript of VOLARA.MX earnings conference call or presentation 26-Jul-19 2:00pm GMT

Q2 2019 Controladora Vuela Compania de Aviacion SAB de CV Earnings Call

Jul 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Controladora Vuela Compania de Aviacion SAB de CV earnings conference call or presentation Friday, July 26, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Enrique Javier Beltranena Mejicano

Controladora Vuela Compañía de Aviación, S.A.B. de C.V. - President, CEO & Director

* Holger Blankenstein

Controladora Vuela Compañía de Aviación, S.A.B. de C.V. - EVP of Airline Commercial & Operations

* Maria Elena Rodriguez Asiain

Controladora Vuela Compañía de Aviación, S.A.B. de C.V. - Corporate Financing, Treasury & IR Director

* Sonia Jerez Burdeus

Controladora Vuela Compañía de Aviación, S.A.B. de C.V. - VP & CFO

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Conference Call Participants

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* Conor T. Cunningham

Cowen and Company, LLC, Research Division - Associate

* Duane Thomas Pfennigwerth

Evercore ISI Institutional Equities, Research Division - Senior MD

* Joshua Milberg

Morgan Stanley, Research Division - Equity Analyst

* Michael John Linenberg

Deutsche Bank AG, Research Division - MD and Senior Company Research Analyst

* Rogério Araújo

UBS Investment Bank, Research Division - Director and Equity Research Analyst

* Stephen Trent

Citigroup Inc, Research Division - Director

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Presentation

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Operator [1]

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Good morning, everyone. Thank you for standing by, and welcome to Volaris' Second Quarter 2019 Financial Results Conference Call. (Operator Instructions). Please note that this event is being recorded. At this point, I would now like to turn the call over to Ms. Maria Elena Rodriguez, Volaris' Corporate Finance and Investor Relations Director. Please go ahead.

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Maria Elena Rodriguez Asiain, Controladora Vuela Compañía de Aviación, S.A.B. de C.V. - Corporate Financing, Treasury & IR Director [2]

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Good morning, everyone, and thank you for joining the call. With us today is our President and CEO; Enrique Beltranena; our Airline Executive Vice President, Holger Blankenstein; and our Vice President and CFO, Sonia Jerez. We will be discussing the company's second quarter results announced yesterday. Afterwards, we will move on to your questions. Please note that this call is for investors and analysts only. Any questions from the media we'll be taking separately.

Before we begin, please let me 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's actual results to differ materially from expectations for reasons described in the company's filings with the U.S. Securities and Exchange Commission. Furthermore, Volaris undertakes no obligation to publicly update or revise any forward-looking statement. It's now my pleasure to turn the call over to Volaris' President and CEO, Mr. Enrique Beltranena.

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Enrique Javier Beltranena Mejicano, Controladora Vuela Compañía de Aviación, S.A.B. de C.V. - President, CEO & Director [3]

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Thank you, Maria Elena, and good morning to everyone, and thank you for joining us today.

Let me begin with some key facts and data of the second quarter. Volaris is one of the 3 lowest unit cost publicly traded airlines in the world with a unit cost ex-fuel during the quarter of USD 0.0389. CASM ex-fuel decreased 3.3% year-over-year.

Total unit revenue in the quarter improved 10% year-over-year. Let me explain some of the elements. Total ancillary revenues increased 39% year-over-year. Volaris' ancillary revenues per passenger increased 10% and now Volaris is among the top 4 airlines in the world.

Second, Volaris is the largest passenger operator in the Mexican market with 40% more passengers carried than our closest competitor during the quarter. In this market, Volaris operates with a load factor of 90%.

Third, Volaris is the global carrier with most direct routes to the U.S. In the last 10 years, we have carried almost 20 million passengers in the transborder market.

In addition to that, with this new Frontier code share, we now connect almost 100 U.S. destinations with our Mexican markets. Volaris completed important strategic financial transactions during the second quarter. The first one was that we secured the landmark sale and leaseback transaction for 22 aircraft that will be delivered between 2020 to year 2022. The terms and lease rates are highly attractive and are historically unprecedented for the company.

The second one is that Volaris successfully issued a MXN 1.5 billion denominated long-term bond in the Mexican public market at a very competitive term, notwithstanding the difficult capital market conditions during the process of placing the instrument. To facilitate development of our Central American initiative, Volaris has established a subsidiary in El Salvador and obtained its airline operator certificate from the Civil Aviation Authority. We are targeting operations to start during August 2019. These achievements led to the following second quarter 2019 results. Total operating revenues increased by 34% with a year-over-year TRASM improvement of 10%. EBITDA margin improved by 10.4 percentage points versus last year closing at 27.7%, and operating cash flow generation of MXN 1.5 billion, a year-over-year improvement of MXN 680 million.

Our on-time performance is on track and scheduled completion is at 99.5%, return on invested capital pretax of 16% at the end of the quarter.

Nevertheless, I would like to additionally highlight that the earnings per ADS for the first half of the year at USD 0.33.

Now I would like to turn the call over to our airline Executive Vice President Holger Blankenstein to talk about the detail of revenues, margin dynamics and give an operational update. Please, Holger.

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Holger Blankenstein, Controladora Vuela Compañía de Aviación, S.A.B. de C.V. - EVP of Airline Commercial & Operations [4]

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Thank you, Enrique. Total ASM growth was 22% above our previous stated guidance as a result of higher utilization, new routes and a focus on our core markets. Domestic ASM growth for the quarter was also 22%. VFR traffic and the bus markets remain our most important drivers of growth.

We have been diversifying our point-to-point network, focusing on noncompeted routes to sustain our double-digit growth. The ultra-low-cost model penetration in the Mexican market is expected to continue throughout 2019 and beyond.

In the international market, our ASM capacity growth was 21%. We continue observing a more sustainable transborder market. The VFR segment showed solid demand supported by remittances from the U.S. Capacity in Central America represented only 3.4% of our total ASMs by the end of the second quarter. The region is maturing well and is contributing to our U.S. dollar-denominated collection. While still a smaller part of our business, it is growing well and performing to our expectations. As Enrique mentioned, we obtained a foreign air carrier permit to operate direct flights from El Salvador, targeting to start during August of this year. El Salvador and Guatemala are the most fertile VFR markets in Central America.

In the second quarter, we started operations in 5 new domestic and 4 new international routes from existing stations in order to continue developing our point-to-point services and attracting first-time flyers. We are strengthening point-to-point presence in cities like Querétaro with 3 new domestic and 1 new international route and from Durango with 2 new domestic and 1 new international route.

In the second quarter, we achieved a passenger volume growth of 26% year-over-year. We improved our total load factor by 1.5 percentage points, which shows that our ultra-low-cost model has been well accepted by the market.

In the domestic market, the load factor was 90% while the international route -- while in the international routes, it was 82%. This represents an improvement of 1 percentage point and 2.8 percentage points, respectively, versus last year.

During the second quarter of 2019, total ancillary revenues reached MXN 2.9 billion, an increase of 39% year-over-year and now accounts for 35% of total operating revenues. We continued improving our v.club and v.pass memberships. By redesigning our purchasing flows and optimizing overall usability and payment processes, we can reach more customers, allowing them to become frequent flyers.

We also launched a new combo ancillary product in the first quarter, which has shown good uptake from our customers in the second quarter.

We are in the process of introducing a new dynamic pricing tool for ancillary revenues in order to maximize revenue in selected products. The rise of ancillary revenues allows us to keep offering the lowest base fares in order to stimulate passenger demand. Such increase in volume supports our growth in terms of TRASM. In the third quarter of this year, we will be adding 2 Airbus A320neo aircraft to a young and fuel-efficient fleet.

Volaris bus switching has been the cornerstone of our growth strategy. As the bus industry in Mexico and Central America accounts for almost 3 billion trips per year, Volaris marketing campaigns are tailor-made to specific media outputs across our customer journey. In 2014, we have carried over 4 million bus switchers. 86% claimed they wouldn't travel again by bus. Over 11% of our customers check bus fares first, yet they choose to fly on Volaris. In 2019, we are also giving special focus to upgrading our digital channels. As a digital airline, almost 70% of our sales are made through our own digital channels. And if we include indirect digital channels like OTAs and agencies, it represents 90% of our total sales.

Today, 90% of Mexican Internet users have a smartphone versus 22% in 2009. The preference of our customers have clearly shifted from desktop to mobile. Currently, traffic from mobile devices represents 64% of our visits to our digital channels. The focus on mobile phones has been a cornerstone of our digital strategy. Our mobile phone chatbot now handles over 80% of customer service interactions, which delivers significant reductions in call center costs. We will continue to invest into our digital storefronts throughout the year with improvements in the purchasing process on the desktop side and better upsell of ancillaries in all channels. All this has resulted in Volaris becoming one of the best airlines in the world in terms of low cost in sales, marketing and distribution.

At the same time, Volaris is rated one of the top brands in Mexico, measured by Merca2.0. And our mobile app is the #5 downloaded app in Mexico. In terms of our code share with Frontier, we now (inaudible) almost 100 cities in the U.S. at minimal incremental cost for the company. During the second quarter, this represented 3.3 percentage points of load factor on U.S. routes.

We are especially pleased with the strength of the VFR traffic. Therefore, we are now planning ASM growth for the third quarter in the high teens for the entire network, relatively evenly split between international and domestic growth. It is important to highlight that we are planning to achieve it through healthy capacity growth, which means high utilization of existing assets.

In summary, we would like to emphasize that TRASM improvement's trend of the last 12 months is going to continue, supported by strong performance in ancillaries and an increasing traffic demand. We achieved a TRASM of MXN 1.355 in the second quarter 2019, 10% higher than the second quarter of 2018. We are keeping up the year with a positive revenue momentum, delivering margin improvements. Higher TRASM continues to be the commercial team's #1 priority.

Now I'd like to hand it over to our Vice President and CFO Sonia Jerez to further discuss our financial performance for the quarter.

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Sonia Jerez Burdeus, Controladora Vuela Compañía de Aviación, S.A.B. de C.V. - VP & CFO [5]

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Thank you, Holger. I will now review the 5 main achievements of the second quarter. First, CASM ex-fuel closed at USD $0.0389, which represents a 3.3% year-over-year reduction. The most important drivers were: one, the continuous company-wide cost reduction program; two, the operation of the company with the most fuel-efficient fleet in the market with an average of 186 seats per aircraft and with 24% of our aircraft with neo technology; and three, utilization. Utilization of our fleet is at 13.1 block hours per day. Block hours per day had an increase of 13.5% year-over-year.

Second achievement: Total CASM was USD 0.065 for the second quarter, in line with last year. The cost-cutting program initiatives continue offsetting the increase in the average economic fuel cost per gallon, which was mainly driven by the new transfer fees added by the jet fuel suppliers in the domestic market.

During the second quarter, Volaris executed a fuel tender in order to partially rectify these incremental transfer costs. The fuel cost savings achieved from the initiative may began materializing during the second half of the year. Additionally, Volaris hedged 30% of its projected jet fuel consumption for the remainder of 2019, mainly through Asian call options at an average strike price of USD 1.91 per gallon.

Third achievement, our solid balance sheet and good liquidity. Volaris had a net cash flow provided by operating activities for the second quarter of MXN 1.5 billion, closing the quarter with cash and cash equivalents of MXN 1.1 billion. This represents 36% of the last 12 months' operating revenues.

The adjusted net debt-to-EBITDA ratio closed at 4.4x.

Fourth, as Enrique mentioned earlier, during the June, the company successfully completed the first tranche of a 5-year MXN 3 billion local bond program with a first issuance of MXN 1.5 billion at the Mexican interbank rate, TIIE, plus 175 basis points. The bond is rated AA+ with a stable outlook by 2 local rating agencies. The investor rate is well diversified, comprising brokerage houses, private banks and private pension funds. It is a Mexican peso denominated debt and it diversifies our financing portfolio.

And our fifth more important achievement, the company executed sales and leaseback documentation of 22 neo aircraft to be delivered from 2020 to 2022. We achieved very attractive lease rate factors from different lessors, mainly from Asia. All these aircraft are fully financed, including the per delivery payments.

In terms of exchange rate status, the Mexican peso has appreciated 1.1% against the U.S. dollar compared to the end of the previous quarter. The company's second quarterly U.S. dollar-denominated collections and [tickets sold] were 44%, partially helping us to insulate the company from exchange rate pressures and reflecting the company's effort to have a natural hedge program. This growing trend in our collections substantially closes the gap of the FX mismatch and bring us closer to becoming FX neutral.

Moving on to our financial results. We exceeded our guidance for adjusted EBITDA margin in the second quarter, reaching 27.7% or MXN 2.3 billion and a 7.9% EBIT margin or MXN 659 million.

Net income for the quarter was 1.5% or MXN 119 million. Our EBITDA margin guidance for the third quarter, assuming current exchange rate and fuel prices, is expected to be in the low 30s or bear in mind on our performance in the second half of 2018 was much improved versus the first half, which will make our second half 2019 year-over-year comparisons smaller. We expect healthy actual results.

Now I'll hand the call back to Enrique for closing remarks.

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Enrique Javier Beltranena Mejicano, Controladora Vuela Compañía de Aviación, S.A.B. de C.V. - President, CEO & Director [6]

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Thank you, Sonia. Volaris has been proactive during the last 2.5 years in counteracting the economic upward pressure on costs.

From the beginning of 2017, the net jet fuel impact on total costs for the company was MXN 1.6 billion. The company-wide efforts to improve our financial performance also focused on the revenue side, accounting for MXN 1.8 billion incremental revenues during the same 30-month period. All in all, the company had a strategy for its healthy capacity growth and deliberate management of departures, [wages and] fleet utilization, passenger demand, load factor, base [personnel] and ancillaries offset the cost hit. Volaris managed its network system to drive higher departures and healthy ASMS and is now #3 in the world, measuring ASMs per aircraft per day. This consolidates itself in the strong productivity of our fleet. Stronger regional market demand produced higher RPMs and load factors that reached 87% across the system. This demand supported higher yields, and with Volaris robust ancillary revenue model will use stronger TRASM increase and top line revenues.

We work hard to rethink and simplify their earning. To the extent that we produced MXN 4.2 billion, let me repeat that number, MXN 4.2 billion in nonoil cost reductions over the same month period. This amount is equivalent to operating the airline for 4 months without incurring any fuel expense.

We have talked about our strong passenger growth, but let me explain and unpack what we see occurring in our markets. Over the last 6 months, Volaris' 21% passenger growth comfortably exceeds our ASM's growth of 17%. And this is not luck or an anomaly, but it is supported by the following macroeconomic indicators. I think there's a lot of moving variables that you must analyze.

Let me start with the first one. GDP growth across Mexico is not uniform. The GDP growth with or without oil production of the individual Mexican states in which we operate is higher than the national average GDP. Remittances growth shows a positive trend with record highs. The U.S. migration limitations and the U.S. economic performance is allowing the U.S. Hispanic population to send more money to their relatives in Mexico who, as a result, are flying more in the domestic Mexican market. This explains our stronger domestic demand and continuous internal tourism growth.

The third measurement is the real wages, and Mexican real wages and private consumption, which remain high -- resilient.

The fourth one is the Mexican Consumer Confidence Index, which continues to grow at a sound pace. And then exports remained positive, mainly in the states where we have more presence. Fare index for the Mexican air transportation industry improved versus previous year.

And finally, the company's growth is not only organic, but also, as Holger mentioned, it is a result of a conscious strategy, which start its new passenger segments. The bus switching strategy has substantially increased our volume over the last decade. Let me give you the numbers. The available bus switching market in Mexico is approximately 38 million people. In 2007, air trips per capita in Mexico were 0.25x growing to 0.40x by the end of 2018, which is still below other developing economies in the region.

Mexico's air traffic grew from 55 million annual passengers in 2007 to 97 million annual passengers by the end of 2018. And this is despite ups and downs in the GDP each of the years that we lived.

In conclusion, we certainly look at several competitive strengths that support our user growth. The first, our capacity to grow as a point-to-point operator in the most important airports in Mexico and our top-tier on-time performance is a clear differentiator, together with our low base fares that have allowed us to become the best travel option in those markets.

Second, our focus on cost per available seat mile ex-fuel positions us among the third -- the 3 lowest cost operators in the world based on public data and audited accounting practices. This cost advantage allows Volaris to expand the ultra-low-cost model in a very profitable way while benefiting a large domestic population with very affordable airfares.

Third, on the operational side, the company executes more than 400 daily take-offs, which allows Volaris to fly a broad diversified system schedule that keeps us attracting new customers.

I want to finish this morning thanking all of our ambassadors, who have done so much to achieve this solid second quarter results whilst also continuing to deliver excellent service and reliability to our customers. I need to thank you to our Board of Directors in supporting us to find ways to increase efficiency and drive productivity. We would like to leave a special thank for Roberto Kriete, for Rodrigo Salcedo and for John R. Wilson for their dedication this many years to the Board. Thank you to our investors for believing in our commitment to the continued development of a successful business. We continue our track record of no excuses, and for 4 quarters in a row, achieving our expected results.

Let me now pass it over to the operator, and we are ready to open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions). We'll take our first question from Duane Pfennigwerth from Evercore.

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Duane Thomas Pfennigwerth, Evercore ISI Institutional Equities, Research Division - Senior MD [2]

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So double-digit TRASM growth, very solid declines in nonfuel cost. Not a lot of models around the world that offer that right now. Driving very strong margin expansion. Can you talk sort of high level your view or your prospects for margin expansion in the back half of the year?

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Enrique Javier Beltranena Mejicano, Controladora Vuela Compañía de Aviación, S.A.B. de C.V. - President, CEO & Director [3]

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Yes, Duane, thank you very much, and thanks for your comments. We strongly think, Duane, we can basically sustain the performance that we had during the first half of the year. Obviously, as I explained, I mean, or Sonia explained, I'm sorry, the numbers of last year in the second half improved dramatically versus the first half. So our comparison is really higher than in the first half. So I'm expecting to continue performing the way we are performing, but probably at a smaller pace.

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Duane Thomas Pfennigwerth, Evercore ISI Institutional Equities, Research Division - Senior MD [4]

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Okay. And then on the A321neo deliveries, are there any recent or incremental delays or supply chain issues that you're seeing? And I know you had to re-slot some of those in the past, but let's say, in the last 30, 60 days, are you seeing any incremental A321neo delays?

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Enrique Javier Beltranena Mejicano, Controladora Vuela Compañía de Aviación, S.A.B. de C.V. - President, CEO & Director [5]

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We only had 1 month delay this year in the 2 deliveries that we took in the first semester. So we are expecting some where there could be the second half.

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Duane Thomas Pfennigwerth, Evercore ISI Institutional Equities, Research Division - Senior MD [6]

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Okay. And then just lastly, 10% TRASM growth. Could you put a -- would you be willing to offer a view on how did that look in domestic versus transborder versus maybe the Central American operation?

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Enrique Javier Beltranena Mejicano, Controladora Vuela Compañía de Aviación, S.A.B. de C.V. - President, CEO & Director [7]

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Thank you, Duane. I will ask Holger to answer that one, please.

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Holger Blankenstein, Controladora Vuela Compañía de Aviación, S.A.B. de C.V. - EVP of Airline Commercial & Operations [8]

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Yes. Thanks, Duane. TRASM expansion was relatively equal between the domestic and international. And obviously, Central America, that's in ramp-up, was probably a little bit higher than 10%. That's the breakdown.

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Operator [9]

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And we'll take our next question from Michael Linenberg of Deutsche Bank.

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Michael John Linenberg, Deutsche Bank AG, Research Division - MD and Senior Company Research Analyst [10]

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I just have a couple here. Just to start with you, Holger, you talked about the capacity growth 22% and then high teens second half of the year, but sort of what caught my ear, is that you have been focusing on routes where there is either little to no competition. I think you said noncompeted routes. And I know we've been seeing that in both your transborder and to maybe a lesser extent, in domestic Mexico. Do you have any sort of breakdown where if you were to look at your domestic city pairs, what percent have head-to-head competition, which presumably actually a decent number of them probably have competition head-to-head. But in the transborder, if you look at the number of city pairs that you're flying today and what percent of them actually have head-to-head competition, I suspect it is actually quite low. But would you actually have any of that data just to support my premise.

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Holger Blankenstein, Controladora Vuela Compañía de Aviación, S.A.B. de C.V. - EVP of Airline Commercial & Operations [11]

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So Michael, what we can tell you is that about 25% of our capacity in terms of ASMs is operated in noncompeted routes. That translates into about 80 routes that have no competition. And if you look at the transborder market, it's actually -- we're also focused on the VFR niches that connect directly to the center of Mexico. So we do have a sizable number of routes that don't have any direct competition in the U.S. as well.

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Michael John Linenberg, Deutsche Bank AG, Research Division - MD and Senior Company Research Analyst [12]

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Okay. Okay, great. Can I ask a question about, in Central America, with the FAA moving Costa Rica to Level 2, from a sort of a safety aspect. As you start, obviously, your -- the new operation out of El Salvador, will you -- I guess, you won't be able to add any additional capacity to the Costa Rican operation until that safety level rating is moved back to what it was previously. Is that correct? Number one. Number two, does it really matter all that much now that you have an El Salvadorian operation, any sort of growth that you were planning for the region, you can take advantage of since the U.S. and many of the Central American countries have open skies, and therefore, they allow fifth freedoms. So it really shouldn't change your plan down there. Can you just -- can you talk about that, I guess, this would be to you, Enrique?

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Enrique Javier Beltranena Mejicano, Controladora Vuela Compañía de Aviación, S.A.B. de C.V. - President, CEO & Director [13]

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Yes, sure. Well, let me tell you, yes, the U.S. rating clearly freezes expansion to the U.S., not to the rest of the areas. Okay? The second point I would like to clarify is, this is a qualification that is given to the Costa Rican aviation surveillance authority. So I want to be very clear that we are working with them to support their efforts to run to normality as soon as possible. But Volaris Costa Rica AOC recently obtained its IASA certificate, which makes our certificate and our operations really safe, okay? The third statement I would like to make is that we have launched so much capacity before this happened that in reality, what we're doing is maturing that capacity. So it is not having an impact on the numbers, rather than that it's making the numbers better. And fourth, I would like to say that, yes, the Salvador operation is going to pick some of that.

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Michael John Linenberg, Deutsche Bank AG, Research Division - MD and Senior Company Research Analyst [14]

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Okay. Okay, that's really helpful. And I think I'm aware, and I'm sure we'll make investors aware that this FAA rating is applicable to the country and not the airlines that are serving the country. So I think we're -- we feel pretty good about your operation.

And just an add-on about the Central American operation is one of your competitors in the region has been scaling back in some of the large markets. I think they recently indicated that they're going to pull out of Miami, El Salvador, Miami, Guatemala City. When I think about Volaris, I know historically, when you fly internationally from some of those markets, you may move into some of the smaller markets, you may target as you target VFR markets. But is it possible that we could see you move into some of what I would call the trunk routes that are being abandoned by one of your largest competitors? Is there an opportunity, say, for you to fly from Miami into some of the key Central American cities?

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Enrique Javier Beltranena Mejicano, Controladora Vuela Compañía de Aviación, S.A.B. de C.V. - President, CEO & Director [15]

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I cannot speak about the upcoming capacity yet until we have authorizations. But we are certainly focused on the region.

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Michael John Linenberg, Deutsche Bank AG, Research Division - MD and Senior Company Research Analyst [16]

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Okay. Great. All right. Well, listen, nice job this quarter, Enrique, and it looks like a good forecast, well done.

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Enrique Javier Beltranena Mejicano, Controladora Vuela Compañía de Aviación, S.A.B. de C.V. - President, CEO & Director [17]

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Thank you very much, Michael. And I appreciate your comment of making the investors know that the qualification of Costa Rica is not about the safety of Volaris, rather than that Volaris is just received the certification, which guarantee safety operation.

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Operator [18]

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We'll take our next question from Josh Milberg of Morgan Stanley,

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Joshua Milberg, Morgan Stanley, Research Division - Equity Analyst [19]

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Congrats on the results. My question relates to the fuel transfer costs that Sonia highlighted. I was just hoping you could comment a little further on that issue and on the initiatives you've taken to address it? And also just with the initiatives, how might we expect those costs to evolve in the second half and next year? That actually seems like it's something that could be a relevant driver in the coming quarters. Correct me if I'm wrong about that.

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Sonia Jerez Burdeus, Controladora Vuela Compañía de Aviación, S.A.B. de C.V. - VP & CFO [20]

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Yes, sure. You're completely right. Yes. So regarding the -- specifically, the fuel costs. As I mentioned, we finalized a fuel tender for domestic market. It was very successful. We were able to reduce our increase on fuel by (inaudible) increase that we had due to the increase of Pemex transfer price. And as I also mentioned, so not only the tender help us to offset fuel costs, but also a lot of cost savings initiatives across the board.

Honestly, regarding our expectations from calendar in the same quarter, remember that we have started the cost savings plans in 2018, which means that we're going to see less improvement during the second half of 2019 compared with '18, but we're continuing -- very, very focused on maintaining our cost ex fuel.

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Joshua Milberg, Morgan Stanley, Research Division - Equity Analyst [21]

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Yes, I was referring specifically to the fuel transfer costs in the second half. But Sonia, you did...

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Enrique Javier Beltranena Mejicano, Controladora Vuela Compañía de Aviación, S.A.B. de C.V. - President, CEO & Director [22]

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So most likely, it's going to be about 1/3 of the first semester cost. I mean a reduction of 1/3 to the first semester cost.

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Sonia Jerez Burdeus, Controladora Vuela Compañía de Aviación, S.A.B. de C.V. - VP & CFO [23]

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Exactly. That's it.

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Enrique Javier Beltranena Mejicano, Controladora Vuela Compañía de Aviación, S.A.B. de C.V. - President, CEO & Director [24]

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In the domestic market, obviously.

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Operator [25]

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We'll take our next question from Helane Becker of Cowen.

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Conor T. Cunningham, Cowen and Company, LLC, Research Division - Associate [26]

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It's actually Conor Cunningham in for Helene. So just -- I know you just raised your capacity outlook and it makes sense, given the demand environment. Just curious, what would need to happen for you guys to either scale back or maybe even push growth further in the coming quarters? Is it simply just a supply and demand equation? Or I mean, just how much does like the competitive response play into that decision?

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Holger Blankenstein, Controladora Vuela Compañía de Aviación, S.A.B. de C.V. - EVP of Airline Commercial & Operations [27]

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Well, first, I'd like to remind everybody that what we're doing is healthy capacity addition. So we're increasing the utilization. We're using our existing assets more effectively by producing more ASMs per aircraft per day. So that's number one.

Number two, clearly, the competitive landscape plays a role also in our capacity guidance and plans going forward. You've seen some of the high cost carriers in Mexico scale back domestic capacity, and we are taking advantage of that and backfilling in our core markets capacity. And obviously, the demand environment plays a very significant role. And we're seeing very healthy demand in the transborder market, in Central America and also in the price-sensitive domestic markets to the beach markets and to the VFR core market.

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Conor T. Cunningham, Cowen and Company, LLC, Research Division - Associate [28]

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Okay, that makes sense. And then just on the RASM side. So it seems like you guys are guiding to RASM to remain positive despite a challenging comp in the third quarter. And I think the comp headwind is really more domestically focused than it is international or Central America. So curious, your expectations around each region in the coming quarters. Is it fair to assume that domestic will lag a little bit, but international and Central America should outperform?

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Holger Blankenstein, Controladora Vuela Compañía de Aviación, S.A.B. de C.V. - EVP of Airline Commercial & Operations [29]

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Again, a quick clarification. We think about our business in terms of TRASM, total RASM, which includes the ancillary piece. And what we've been seeing is declines in yields or in RASM and increases in our ancillary business, which leads to a higher TRASM overall. To split it down by regions, we continue to see relatively similar growth in TRASM in both geographies, U.S. transborder and the domestic market. And then as Central America is in ramp-up, TRASM growth there would be a little bit higher than the average.

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Operator [30]

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So we'll take our next question from Rogério Araújo of UBS.

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Rogério Araújo, UBS Investment Bank, Research Division - Director and Equity Research Analyst [31]

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I have a couple of questions. One is a follow-up on the very strong TRASM. So is there a possible way that you could break down which routes are explaining this very strong TRASM expansion even with a 22% ASM increase in the period. So what I mean is, if you break it down routes in which your competitors are taking out capacity from with routes that your competitors' capacity is flattish, is there a huge difference between them? In other words, is most of this very strong TRASM has been explained by those routes in which your competitors are taking out capacity from or not. This is the first question.

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Holger Blankenstein, Controladora Vuela Compañía de Aviación, S.A.B. de C.V. - EVP of Airline Commercial & Operations [32]

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So we don't break down TRASM by geographies, specifically, but what we can tell you is that we're seeing TRASM lift across the network. And here, it is important to mention that Volaris' healthy capacity growth is focused on the northwest of the country and less on the southeast of the country. And if you look at regional GDP growth in Mexico, the country's GDP growth has been stronger in the northwest of the country. For example, we've seen new routes in Querétaro, Aguascalientes, Bajío, Guadalajara. Those are cities, secondary cities in Mexico, which are located in the center and in the west of the country and that has contributed definitely positively to our TRASM expansion.

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Rogério Araújo, UBS Investment Bank, Research Division - Director and Equity Research Analyst [33]

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Okay. What about -- what about routes in which your competitors are taking out capacity from? Is it also boosting the TRASM?

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Holger Blankenstein, Controladora Vuela Compañía de Aviación, S.A.B. de C.V. - EVP of Airline Commercial & Operations [34]

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We are very clear about our core business in the center and west of the country, and we are closely observing capacity movements from the competitors in those markets.

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Rogério Araújo, UBS Investment Bank, Research Division - Director and Equity Research Analyst [35]

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Okay. So my second question is on the other operating income. There was a significant gain about MXN 220 million. My question is, is this related to sales and leaseback gains? And also, a follow-up. Is there any nonrecurring item in this result in the revenue or in the cost besides this likely sale leaseback?

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Sonia Jerez Burdeus, Controladora Vuela Compañía de Aviación, S.A.B. de C.V. - VP & CFO [36]

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So here, so the company in the second quarter has 2 aircraft arriving and based on IFRS adoption that we did in January this year, we have to amortize those sales and leaseback gains over the lease term. That compares differently to 2018 where those gains were accounted as a one-off.

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Rogério Araújo, UBS Investment Bank, Research Division - Director and Equity Research Analyst [37]

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Sorry, can you explain this better?

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Sonia Jerez Burdeus, Controladora Vuela Compañía de Aviación, S.A.B. de C.V. - VP & CFO [38]

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Yes, sure. So IFRS accounting rules. So allow -- it's an obligation that the sales and leaseback gains must be deferred over the lease period. So -- but before IFRS, all those gains were accounted as a one-off.

It is clear?

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Rogério Araújo, UBS Investment Bank, Research Division - Director and Equity Research Analyst [39]

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Yes, it is clear. So the other operating income line, this is not a one-off gain from sales leaseback, right?

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Enrique Javier Beltranena Mejicano, Controladora Vuela Compañía de Aviación, S.A.B. de C.V. - President, CEO & Director [40]

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Yes. So in reality, what's going on is you are comparing versus a year where we used to put the onetime shot in -- when the aircraft arrived. And now that's amortized through, let's say, 12-year period, okay? So that's the new rule, okay? And that explains the reduction of 46.7% versus previous year. And it's basically because of the new IFRS adoption.

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Rogério Araújo, UBS Investment Bank, Research Division - Director and Equity Research Analyst [41]

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Yes. Yes, it's clear. And -- but there is still a gain. So what is this related to?

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Sonia Jerez Burdeus, Controladora Vuela Compañía de Aviación, S.A.B. de C.V. - VP & CFO [42]

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So this is...

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Enrique Javier Beltranena Mejicano, Controladora Vuela Compañía de Aviación, S.A.B. de C.V. - President, CEO & Director [43]

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I'm not sure I'm understanding your question.

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Rogério Araújo, UBS Investment Bank, Research Division - Director and Equity Research Analyst [44]

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Yes. So I want to know what is included in this other operating income line.

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Enrique Javier Beltranena Mejicano, Controladora Vuela Compañía de Aviación, S.A.B. de C.V. - President, CEO & Director [45]

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The sale leaseback gain?

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Sonia Jerez Burdeus, Controladora Vuela Compañía de Aviación, S.A.B. de C.V. - VP & CFO [46]

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It is a more important topic.

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Enrique Javier Beltranena Mejicano, Controladora Vuela Compañía de Aviación, S.A.B. de C.V. - President, CEO & Director [47]

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We also have administrative expenses, travel expenses, technology and communications, marketing, but that's much more in the other operating expenses line.

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Rogério Araújo, UBS Investment Bank, Research Division - Director and Equity Research Analyst [48]

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Okay. So was there any relevant one-off impact this quarter?

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Enrique Javier Beltranena Mejicano, Controladora Vuela Compañía de Aviación, S.A.B. de C.V. - President, CEO & Director [49]

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No.

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Sonia Jerez Burdeus, Controladora Vuela Compañía de Aviación, S.A.B. de C.V. - VP & CFO [50]

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No.

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Enrique Javier Beltranena Mejicano, Controladora Vuela Compañía de Aviación, S.A.B. de C.V. - President, CEO & Director [51]

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It's just the sale leaseback of the...

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Sonia Jerez Burdeus, Controladora Vuela Compañía de Aviación, S.A.B. de C.V. - VP & CFO [52]

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Yes. I got it.

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Operator [53]

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And we'll take our next question from Stephen Trent of Citi.

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Stephen Trent, Citigroup Inc, Research Division - Director [54]

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Some of my questions have already been answered, but I wanted to dig in a little bit on some of your digital initiatives. So I know you guys recently launched YAVAS. And sort of any color as to what sort of program growth we can think about over the next 6 months or so? And how this might contribute to your RASM, CASM spreads.

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Holger Blankenstein, Controladora Vuela Compañía de Aviación, S.A.B. de C.V. - EVP of Airline Commercial & Operations [55]

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Yes. Stephen. So we launched YAVAS publicly in mid-April 2019. So we are talking about a 3-month period that it's been running.

Currently, the project is maturing, and this has a positive trend. But I would say that it's currently not material for the ancillary revenues yet. We see sales of that new business unit growing week over week. And we are seeing quite healthy margins in that business. But clearly, we have a road map to make this business more meaningful in the future. We're focusing on strengthening the content in those -- in the offering, elevating our online brand awareness, which will obviously boost sales while maintaining the quite healthy margins in the business. So eventually, it will contribute in a more meaningful way to the ancillary revenues per passenger.

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Stephen Trent, Citigroup Inc, Research Division - Director [56]

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Okay. Very helpful, Holger, appreciate that. And just one other thing, and you've already kind of answered it. You guys had mentioned some time back that there were a couple of dozen routes where no airline was serving, only interstate bus, and I know you've certainly launched a service on some of those routes. When you think about these new opportunities from some of your competitors pulling back, et cetera, any sort of broad sense how much is left of that first category that's perhaps only currently served by interstate bus or cross-border bus service, et cetera?

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Holger Blankenstein, Controladora Vuela Compañía de Aviación, S.A.B. de C.V. - EVP of Airline Commercial & Operations [57]

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So Stephen, there are several midsized cities in Mexico that we don't operate yet, we don't have service to. So that's about 10 airports. So we're looking at that. And then we are adding point-to-point service between cities that we already operate. And we do believe that looking at the bus traffic and the bus runs between those cities, there continues to be a sizable opportunity for adding service in those secondary markets, between cities that we already operate. So connecting the dots, so to say.

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Operator [58]

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There are no further questions at this time. I'd be happy to return the call to management.

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Enrique Javier Beltranena Mejicano, Controladora Vuela Compañía de Aviación, S.A.B. de C.V. - President, CEO & Director [59]

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So I would like to close with a topic which grows in importance daily at Volaris. And it's the corporate sustainability. Each year, we work hard to increase our efforts in this area. The IR team will share our annual sustainability report together with a project, which is very near and dear to Volaris. It's called a movie, which is called Serpiente Emplumada that we supported. And this documentary follows the quetzal bird and the environmental impacts on its Mesoamerican habitat. It is our hope that this film will generate awareness in the importance of protecting our environment in the areas where we fly.

Finally, I would like to thank you, everybody, for listening, for investing in Volaris and supporting the efforts of this management, which keeps on doing efforts to improve performance.

Operator, thank you very much for all your support, and I hope you have a great weekend.

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Operator [60]

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This does conclude today's Volaris' Second Quarter 2019 Financial Results Conference Call. You may now disconnect your lines, and everyone, have a great day.