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Edited Transcript of VOLARA.MX earnings conference call or presentation 20-Apr-17 2:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Controladora Vuela Compania de Aviacion SAB de CV Earnings Call

Apr 20, 2017 (Thomson StreetEvents) -- Edited Transcript of Controladora Vuela Compania de Aviacion SAB de CV earnings conference call or presentation Thursday, April 20, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andres Pliego

Controladora Vuela Compania de Aviacion SAB de CV - Financial Planning and IR Director

* Enrique Beltranena

Controladora Vuela Compania de Aviacion SAB de CV - CEO

* Fernando Suarez

Controladora Vuela Compania de Aviacion SAB de CV - CFO

* Holger Blankenstein

Controladora Vuela Compania de Aviacion SAB de CV - Chief Commercial Officer

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Conference Call Participants

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* Michael Linenberg

* Helane Becker

Cowen and Company - Analyst

* Duane Pfennigwerth

Evercore ISI - Analyst

* Renato Salomone

Itau BBA International, S.A. - Analyst

* Stephen Trent

Citigroup - Analyst

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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' first-quarter 2017 financial results conference call. All lines are in a listen-only mode. (Operator Instructions). Please note that this event is being recorded.

At this point, I would now like to turn the call over to Mr. Andres Pliego, Volaris' Financial Planning and Investor Relations Director. Please go ahead sir.

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Andres Pliego, Controladora Vuela Compania de Aviacion SAB de CV - Financial Planning and IR Director [2]

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Thank you. Good morning, everyone, and thank you for joining the call. With me today we have Enrique Beltranena, CEO, Fernando Suarez, CFO, and Holger Blankenstein, CCO. They will be discussing the Company's first-quarter 2016 results announced today. Afterwards, we will move on to your questions.

Please note that this call is for investors and analysts only. Any questions from the media will be taken on an individual basis.

Before we begin, please let me remind everyone that some of the statements we will make on this call were considered 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 US Securities and Exchange Commission. Furthermore, Volaris undertakes no obligation to publicly update or revise any forward-looking statements.

It is now my pleasure to turn the call over to our CEO, Enrique Beltranena.

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Enrique Beltranena, Controladora Vuela Compania de Aviacion SAB de CV - CEO [3]

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Thank you Andres. Good morning and thank you all for being with us today.

The first three months of the year 2017 presented an array of factors that challenge our performance trajectory. For starters, we had achieved of the highly traveled holiday and Easter weeks from the first quarter in 2016 to the second quarter of this year, so this gives us a tough basis of comparison. In addition, 2016 was a leap year, so, this February, we are missing an extra day of operation.

On top of these calendar factors, we had other external macro and geopolitical factors that impacted the travel demand between Mexico and the US, a key market for us. Nevertheless, the macro figures in Mexico continued to be modestly strong with same-store sales increasing 4% during March. Remittances in dollar terms are also increasing by 2% in January and February as well as consumer confidence recovering strength towards the end of the quarter.

I want to take a few minutes to go over the month-to-month dynamics of what we experienced so that you can understand the first quarter for Volaris and how we responded to adjust for these effects and put us on the right footing for the remainder of the year. Starting with January, as I have mentioned, despite the macro and geopolitical shocks, we noted strong demand growth in Mexico, and not just for airlines. We saw strong consumption indicators and a healthy demand environment throughout the country. Accordingly, Volaris started 2017 with a strong January traffic print.

Moving on to February, we started the month with a softer demand environment and weak fares, especially in (inaudible) leisure markets which we attribute mainly to uncertainty from the following factors -- first, the US discussions on travel bans; talks about stricter passenger screening methods and vetting procedures; visa and migratory status debates; and tensions in general in the Mexico-US bilateral agenda such a stretch of a master cancellation. This resulted in people being much more reluctant to travel from Mexico to Central America to the US. We reacted immediately with a reduction of capacity growth.

From January to February, growth rates were cut by 9 percentage points and from February to March was another 9 percentage points in the ASM growth. We also have to decrease our base for it to stimulate demand in the US markets. For the second half of the month, we began to see an improving demand environment, which allowed us to partially recover total unit revenues towards the end of the month.

Now, in February, load factor was soft at 80% with a low 76% in international. This shows a strong load factor in the domestic market for a low season month, but, as I mentioned, the push to sustain it was the result of a capacity reduction together with the further dilution of the base fare. We also observed that markets with US DFR traffic were not as impacted as the US bond leisure markets.

In March, we had a slightly better recovery in the bookings versus February and we started to see market demand uncertainty decrease. Therefore, demand began to strengthen. However, the year-over-year comparison among traffic and revenue indicators show the effect of Holy and Easter weeks taking place in the second quarter instead of the first, as it did last year.

In March, we also had our special anniversary sale, which was a success. It showed the recovery trend in the market with healthier bookings for upcoming months still with lower US bound demand. Nonetheless, we continue to be cautious with our growth to match the lower base demand environment we are seeing in the market.

Also in March, the Company implemented a new baggage policy on the routes to and from the US, so we are charging for the first checked bag for new bookings as of March 1. In general, the implementation has been seamless with good customers' acceptance. In addition, today, our main competitors are all charging for the first bag, which no longer puts us at a disadvantage from the consumer perspective.

In sum, during the first quarter, we faced a changing environment with a tough year-over-year comparison. Our network load factor for the quarter of 83% is a good number despite the seasonality effect, and a decrease of 4.2 percentage points on the international load factor. Despite the 17% ASM growth in the first quarter, the Company didn't take any additional aircraft.

On the cost side, we also faced important headwinds, both in fuel price and exchange rates with year-on-year increases of 68% and 13% respectively, generating an increase in our operating expenses of 48%. Nevertheless, our unit cost remains within the top operators of the world at USD0.053 CASM (technical difficulty).

In terms of profitability for the first quarter, and despite the volatility in the marketplace, we met our profitability guidance provided during our last earnings call with an adjusted EBITDAR margin of 19%. We have positive net cash flow from operating activities of MXN469 million. And I want to repeat this. We had positive net cash flow from operating activities at the end of the first quarter with a strong cash and cash equivalents position of MXN6.8 billion.

Now let's talk about our second quarter and how we see it performing. We have already revised our ASM growth expectations downwards by approximately 8% -- percentage points -- to a range of 16% to 18% to meet the lower demand environment. We will, however, continue to be cautious with our capacity growth and we'll analyze the progress as we get more visibility. Everything is pointing to us being able to reinstate some capacity in June, but, at this stage, we want to be conservative.

Traffic register for Holy Week in April posted strong (technical difficulty) with a stronger domestic and a softer international demand. Revenue growth for the second quarter at this moment looks in line with capacity growth, but we need to pay close attention month to month. This leads us to be cautiously optimistic that the landscape is more upbeat.

About switching efforts, we are really optimistic. As for service we conducted in February, we now know that approximately 8% or 6% last year of our passengers were first-time flyers. Over 20% also considered traveling by bus, 15% had traveled the same route by bus, and only 8% would consider traveling by bus again in the future. We also learned that, when deciding on flying versus taking the bus, the time it takes to make the trip had more weight than the fare, which makes Volaris the clear choice amongst passengers by also having very competitive fares compared to the buses.

Now let me pass it to Fernando, who will elaborate on our financial performance for the quarter. Thank you very much.

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Fernando Suarez, Controladora Vuela Compania de Aviacion SAB de CV - CFO [4]

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Thank you Enrique. I'll be reviewing our results for the figures filed with the SEC and BMB this morning.

Total operating revenues for the first quarter reached MXN5.7 billion, up 9% compared to the same period last year. During the first quarter, non-ticket revenues reached MXN1.6 billion, an increase of 28% year-over-year. US dollar denominated collection was approximately 40%, partially helping to insulate the Company from exchange rate pressures.

Moving on to costs, CASM was equal to [MXN1.414] for the quarter, a 27% year-over-year increase, mainly driven by the economic fuel price increase of 68% and average exchange rate depreciation of 13%. The FX increase impacted dollar-denominated cost line items such as fuel, aircraft and engine rent expenses, and certain traffic and maintenance costs. We also note that, this quarter, we did not have the benefit of any gains from sale leasebacks in the other operating income line as opposed to the same quarter last year.

The total average blended economic fuel cost per gallon for the first quarter was $2.0, which includes the recognition of call option premiums of USD0.08 per gallon, partially offset by the benefit from some of our call options that now expired in the money for the quarter.

Fuel costs represented 29% of total operating expenses for the quarter. During the first quarter, we did not incorporate any additional aircraft. Hence, as mentioned, nor did we post any gains on sale and lease back operations. We finished the quarter with a fleet of 68 aircraft composed of 14 A319s, 44 A320s, and 10 A321s with an average age of 4.4 years. At the end of the first quarter, Volaris' fleet had an average of 179 seats per aircraft, reflecting our fleet upgauge strategy and 62% of the seats were in sharklet-equipped aircraft, on track to continue improving fuel burn in our fleet.

We remain active in terms of fuel risk management. Looking forward for calendar 2017, we have purchased call options to hedge approximately 50% of the expected jet fuel consumption at an average price of $1.48 per gallon. We have also hedged approximately 40% of 2018 at an average price of $1.75 per gallon.

Adjusted EBITDAR in the first quarter was MXN1.1 billion, equal to a 19% adjusted EBITDAR margin. Operating loss was MXN772 million for the quarter, representing a negative 14% operating margin.

During the quarter, we experienced FX headwinds above the line. However, we observed an appreciation of the Mexican peso at the end of the quarter. As you may recall, we have been active in managing our balance sheet by holding a higher US dollar net monetary asset position, which, due to the appreciation of the Mexican peso at the end of the first quarter, led to an FX loss of MXN1.1 billion below the operating line. Conversely, when the Mexican peso had depreciated in previous quarters, we had booked important FX gains below the line.

Net loss for the quarter was MXN1.4 billion with a net margin of minus 24%. The loss per Series A share was MXN1.3 and USD0.71 per ADS.

On the balance sheet, we continue to build financial strength with a cash liquidity position that provides us with flexibility to grow at healthy rates and maintain a comfortable financing profile. As of March 31, Volaris registered MXN6.8 billion in unrestricted cash, representing 29% of the last 12 months' operating revenues. We maintain negative net debt for a net cash position of MXN4.8 billion.

During the quarter, we had a positive net cash flow from operating activity of MXN469 million. This, together with financing and investing activities as well as a net foreign exchange effect of minus MXN533 million from our high mix of unrestricted cash balance in US dollars, resulted in a total net cash decrease of only MXN233 million.

Moving on to 2017 capacity guidance, in terms of ASMs, we have elements that make us believe we can maintain our full-year guidance of in or around 15% growth. Specifically, for the second quarter, we expect to grow ASMs in the 16% to 18% range, again bearing in mind the seasonality effect of having Holy and Easter weeks in the second quarter, plus delays on aircraft deliveries.

Regarding profitability guidance, we expect to achieve an adjusted EBITDAR margin in the range of 26% to 29% for the second quarter, assuming current spot exchange rate and jet fuel prices, which could represent up to 10 percentage points of adjusted EBITDAR margin improvement quarter-over-quarter. We will not have any sale and leaseback transactions in the second quarter. If we make a pro forma over the first quarter of last year, which included the Holy and Easter weeks, by adjusting to current FX and fuel prices and excluding the benefit of sale and leaseback gains from such quarter, the result would be an adjusted EBITDAR margin similar to our second-quarter 2017 profitability guidance that we have just given. On rental guidance, our aircraft and engine rental expense for the second quarter is expected to be in the order of $80 million.

Now I'll pass it over to Enrique for closing remarks.

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Enrique Beltranena, Controladora Vuela Compania de Aviacion SAB de CV - CEO [5]

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Thank you very much, Fernando. I think that, given the environment that we had in the first quarter, the Volaris team reacted promptly to the challenging market and the geopolitical environment. We managed capacity (inaudible) growth.

Despite the headwinds, we believe that the Company's fundamentals remain strong. We continue to have a cost advantage, we keep on rolling out our unbundling product strategy by growing non-ticket revenues. Our boss campaign remains actively producing most features and, as Fernando said, we think that our quarter could be 10% touch points of adjusted EBITDAR margin improvement quarter-over-quarter.

On the financial side, we generated positive cash flow and we have a strong US dollar balance sheet. We currently perceive a more normalized environment for the second quarter, part of which has already been reflected in certain key macro indicators such as the recent Mexican peso appreciation, and specifically the domestic air travel market remains strong.

I want to conclude by thanking our management team, our ambassadors, our loyal customers, because, when we are in crisis, we are much more thankful for the support that we get from everybody of them and for getting us through these periods successfully.

Thank you for your attention. Operator, 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). Michael Linenberg, Deutsche Bank.

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Michael Linenberg, [2]

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Thank you. Good morning everybody. I have a couple of questions here. Enrique or maybe Holger can answer this. You talked about the depression in northbound traffic from Mexico to the US. Can you give us any sense on how much that has shifted? I mean, absent capacity additions, are we seeing that market -- has it slowed? Is it negative? Any color that you can tell us about that market in particular, how that has shifted?

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Holger Blankenstein, Controladora Vuela Compania de Aviacion SAB de CV - Chief Commercial Officer [3]

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The northbound leisure is obviously very much affected by the exchange rate of the Mexican peso. As the Mexican peso depreciates, it gets more expensive for Mexican tourists to go to the US. So what we've seen when the peso was at MXN20, MXN21, there was a big decline in northbound leisure demand. This had changed in the end of February, I would say, and throughout March building up to the Holy Week and Easter, where the peso has recovered to levels below MXN19. And people are making travel plans to go to the US again. Nevertheless, we have been very cautious with our capacity additions to those markets, and we have tripped capacity in some of those markets in order to be able to recover our load factors.

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Enrique Beltranena, Controladora Vuela Compania de Aviacion SAB de CV - CEO [4]

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Let me tell you, I think the traffic in general is recovering, and we are seeing much better performance clearly, okay? But yesterday, after the talks from the President in the US of NAFTA, the peso devaluated $0.25. So it's still very, very volatile. So, that's what has us concerned. The volatility has us very concerned.

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Michael Linenberg, [5]

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So, that's true, no, that's helpful. I guess just a question to Fernando. On your fuel price, so you obviously got the benefit of a fuel hedge that brought it down to like $1.64. But then I know you talked about I guess there was some hedge impact, maybe some negative hedge impact, of $0.08 per gallon. And I'm just curious. Why is your total at $2.00 per gallon? I know that's the blended number. Why is that so much higher? Is it just the taxes that you have to pay on an all-in basis? Is it the interplane costs? Because it would seem like getting the benefit of that hedge, based on where the market was, that your all-in fuel price would be a bit lower than $2.00 per gallon. What's going on there?

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Fernando Suarez, Controladora Vuela Compania de Aviacion SAB de CV - CFO [6]

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The $2.00 per gallon that you have in the column of the financials, that's just a conveniency translation to the end of period exchange rate. So the number was much less than that.

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Michael Linenberg, [7]

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I see, okay. The actual prices -- okay, that's helpful. And then just my last question on --

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Fernando Suarez, Controladora Vuela Compania de Aviacion SAB de CV - CFO [8]

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Let me just give you the actual number that we stated. The actual average was $1.82 per gallon.

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Michael Linenberg, [9]

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Okay, great. And just my last question, and maybe this is for Enrique. With the Costa Rican operation looking to fly to the United States, several carriers have come out. At least one carrier has come out and started -- question the citizenship of the carrier. Are there ways that you can address that from a citizenship perspective so that the Costa Rican operation can fly nonstop to the US? Is there like a plan B?

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Enrique Beltranena, Controladora Vuela Compania de Aviacion SAB de CV - CEO [10]

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Yes, we do have a plan B. I do have to reassure about that. We can't comment right at this moment on the topic because we are in the middle of the discussions, and we still have not filed that were answered. But you can be absolutely sure that we have a Plan B. (multiple speakers)

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Michael Linenberg, [11]

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That's what I figured. Okay, great. Good luck with that. Thanks Enrique. Thanks everyone.

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Operator [12]

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Helane Becker, Cowen and Company.

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Helane Becker, Cowen and Company - Analyst [13]

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Hi guys. Thanks for the time. Fernando, just really quickly, I thought you said $1.52 a gallon, 1-5-2. Isn't that right?

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Fernando Suarez, Controladora Vuela Compania de Aviacion SAB de CV - CFO [14]

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$1.82 per gallon.

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Helane Becker, Cowen and Company - Analyst [15]

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$1.8 -- okay, sorry. I guess I heard that incorrectly. Okay, thanks for that clarification. Now I just have a few questions. Can you say what Easter exactly impact was in the first quarter, and what you think the recovery is in the second quarter?

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Enrique Beltranena, Controladora Vuela Compania de Aviacion SAB de CV - CEO [16]

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I think Fernando said it very nicely when he presented the shift, and when we adjust the first quarter of last year with fuel and exchange rate adjustments, and we take away the benefit of the purchase of one aircraft that we had in the first quarter of last year, our second quarter looks with the same margin of last year. So, that's a very successful change, okay? And I see it very positive.

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Helane Becker, Cowen and Company - Analyst [17]

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Okay, right. So, we are looking at something, I think you said 10% margin improvement first quarter to second quarter.

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Enrique Beltranena, Controladora Vuela Compania de Aviacion SAB de CV - CEO [18]

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Absolutely.

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Helane Becker, Cowen and Company - Analyst [19]

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Okay, perfect. I'm sorry?

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Enrique Beltranena, Controladora Vuela Compania de Aviacion SAB de CV - CEO [20]

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Up to 10 percentage points, correct.

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Helane Becker, Cowen and Company - Analyst [21]

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Up to 10% (sic -- "10 percentage"), okay. And then the other thing is can you say what the bag fee benefit was in March, and if there was anything weird in the booking curve that maybe would come through into the second quarter?

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Holger Blankenstein, Controladora Vuela Compania de Aviacion SAB de CV - Chief Commercial Officer [22]

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Yes, we started charging for the first bag for new bookings starting March 1. And please consider that we already had a certain amount of bookings as we went into March, so it's only for the new bookings from there on. So the effects on March is relatively small, and the effect of the first bag will ramp up throughout the second quarter as we get more and more bookings onto the new policy. The uptake has been relatively strong and we don't see any material decrease in conversion rates of people that take their first bag, which is very positive. And we've been able to pass along a little bit of better fares to our US customers in return of for charging the first bag, and that has helped to stimulate demand, definitely.

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Helane Becker, Cowen and Company - Analyst [23]

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Okay, perfect. And then just one last question. If the market continues to be kind of the way it is right now, yesterday's comments by -- or yesterday's comments notwithstanding, you would expect margin, EBITDAR margin, to improve further in the second half of the year from the second quarter?

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Enrique Beltranena, Controladora Vuela Compania de Aviacion SAB de CV - CEO [24]

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Yes. Absolutely. But here the answer is do you know if the comments will continue and what is going to happen. We don't have any certainty on that.

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Helane Becker, Cowen and Company - Analyst [25]

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Right.

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Fernando Suarez, Controladora Vuela Compania de Aviacion SAB de CV - CFO [26]

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Specifically, the third quarter is seasonally our strongest quarter. So, yes, we expect better quarter-over-quarter margins, obviously.

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Helane Becker, Cowen and Company - Analyst [27]

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Right, that would make sense. Okay, all right. Thanks for your help guys.

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Enrique Beltranena, Controladora Vuela Compania de Aviacion SAB de CV - CEO [28]

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All things being equal, exchange rate is very important.

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Helane Becker, Cowen and Company - Analyst [29]

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Right, I know, that's --

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Enrique Beltranena, Controladora Vuela Compania de Aviacion SAB de CV - CEO [30]

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It's pretty straightforward and we know pretty much what's going on with it this year, but the exchange rate is something that we need to track.

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Holger Blankenstein, Controladora Vuela Compania de Aviacion SAB de CV - Chief Commercial Officer [31]

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(multiple speakers) we have cost certainty for 80% to 50% of our consumption for the year, so that gives us some visibility on the cost side.

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Helane Becker, Cowen and Company - Analyst [32]

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And then just on the aircraft schedule, are you going to put an updated aircraft delivery schedule in the 10-Q or 6-K when you file it?

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Fernando Suarez, Controladora Vuela Compania de Aviacion SAB de CV - CFO [33]

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Yes we will. As anticipated we are currently at 68 aircraft at the end of the quarter. We redelivered one aircraft in the first quarter. We're going to redelivered two aircraft in the second quarter. We're just going to get one delivery in the second quarter, hence the capacity guidance that we are giving for the second quarter. And we have been experiencing some delays from the manufacturer. So, we will probably be ending the year with less aircraft than originally planned, which should be in around 71 aircraft.

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Helane Becker, Cowen and Company - Analyst [34]

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Okay. Okay, thanks guys. I appreciate your help.

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Enrique Beltranena, Controladora Vuela Compania de Aviacion SAB de CV - CEO [35]

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Thank you very much, as always, for supporting us.

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Operator [36]

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(Operator Instructions). Duane Pfennigwerth, Evercore.

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Duane Pfennigwerth, Evercore ISI - Analyst [37]

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Good morning. With respect to the 8 points in lower capacity growth versus your initial plans, can you just remind us how much of that is a reduction in sort of Mexico to the US, how much of that was Mexico domestic and how much maybe relates to Central America?

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Fernando Suarez, Controladora Vuela Compania de Aviacion SAB de CV - CFO [38]

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So, for Central America, we have not changed our capacity plan. For the US bound leisure markets, we have trimmed capacity, as I mentioned before. In general, we are a little bit more cautious on the US-Mexico transporter market, so we've reduced our capacity estimates. They are more than in domestic market. The domestic market volume has been quite stable and has been quite bullish as people shift their travel plans from the US to Mexico.

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Duane Pfennigwerth, Evercore ISI - Analyst [39]

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Okay. Maybe just to follow-up there, would you care to put a finer point on those regions with respect to kind of revenue growing in line with capacity? Are there any regions where you see revenue growing faster than capacity?

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Holger Blankenstein, Controladora Vuela Compania de Aviacion SAB de CV - Chief Commercial Officer [40]

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I would like to reiterate that, in the domestic market, we are seeing revenues growing quite strongly, better than capacity growth. That is mostly due to the seasonality effect. And we are cautious on the transporter market, cautiously optimistic on the transporter market, as we have seen bookings pick up as well in those markets.

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Enrique Beltranena, Controladora Vuela Compania de Aviacion SAB de CV - CEO [41]

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By the way, in the second quarter, we are recuperating our sales percentage to levels by far better than in the first quarter, even out-matching them incrementally in a sense. So that means that remember the problem we had in the first quarter happened at the end of January, so it wasn't in the middle the quarter, and we couldn't react as much as fast as we wanted because sales were already done. Okay? This quarter, I mean the capacity will clearly be matching the amount of growth that we are expecting on the revenue guidance.

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Duane Pfennigwerth, Evercore ISI - Analyst [42]

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Thank you. And then just lastly, maybe I wasn't paying enough attention during Helane's question, but it feels like you got no contribution basically from the international bag fee, or very de minimis, in the March quarter. What do you see that contribution being when it's fully run rated? Thanks for taking the questions.

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Holger Blankenstein, Controladora Vuela Compania de Aviacion SAB de CV - Chief Commercial Officer [43]

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So what we are seeing in the March quarter is we started the new baggage policy on March 1, so late in the quarter, and only for new bookings. So the effect of the first bag was relatively minimal in March. However, that is going to ramp up throughout the second quarter and third quarter as more and more customers book under the new policy.

What makes us relatively optimistic on the bag fee is that we don't see any significant decline in people taking first bags on their trips to the US or from the US. So, currently, we are charging around about $20 for the first bag, depending on when you book it, and we don't see any meaningful decline in coverage rates. And I think (multiple speakers)

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Duane Pfennigwerth, Evercore ISI - Analyst [44]

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Would you care to share what those conversion rates are, how many -- what percentage of your customers take a first bag with them?

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Holger Blankenstein, Controladora Vuela Compania de Aviacion SAB de CV - Chief Commercial Officer [45]

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It's north of 70%.

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Duane Pfennigwerth, Evercore ISI - Analyst [46]

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Thank you.

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Enrique Beltranena, Controladora Vuela Compania de Aviacion SAB de CV - CEO [47]

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Thanks to you, Duane. Thank you very much for your questions.

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Operator [48]

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Renato Salomone, Itau.

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Renato Salomone, Itau BBA International, S.A. - Analyst [49]

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Good morning. Thanks for taking my question. Can you please give me the color of the competitive environment in key domestic routes? More specifically, is there any market or route where you're seeing unusual commercial aggressiveness?

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Holger Blankenstein, Controladora Vuela Compania de Aviacion SAB de CV - Chief Commercial Officer [50]

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We are seeing short-term demand pressures obviously from everybody due to the FX and uncertainty around traveling across the world, so there's a general demand softness. In particular, what we've seen our competitors do in Mexico City International Airport, Aeromexico and INTERJET are both competing head-to-head in Mexico City. They have a majority of their capacity in and out from Mexico City International Airport, whereas we have a more diversified network. And demand in our core markets and especially in the DFR markets has been relatively strong. So we are being affected by significantly lower yield in Mexico City International Airport, but we are making up part of that through other markets in our strengths in Guadalajara, Tijuana, Cancun, and all around the country. So that's I would say the most important headline that I'd like to share.

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Renato Salomone, Itau BBA International, S.A. - Analyst [51]

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Perfect. And if I may have just a quick follow-up, on aircraft utilization, you disclosed an average utilization of 12.4 hours in the quarter. Can you please give us the color of how much this utilization decreased as you cut capacity in the quarter, and what can we expect for the second quarter?

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Holger Blankenstein, Controladora Vuela Compania de Aviacion SAB de CV - Chief Commercial Officer [52]

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So we have done in the first quarter is reduce some daily utilization by approximately 0.5 hours. That equates to the capacity cut that Enrique mentioned in his opening remarks. In the second quarter, we estimate that demand -- that utilization would fall approximately in the same amount.

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Renato Salomone, Itau BBA International, S.A. - Analyst [53]

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Thank you.

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Operator [54]

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Stephen Trent, Citi.

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Stephen Trent, Citigroup - Analyst [55]

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Thanks. Good morning, everybody, and thanks for taking my questions. Most of mine have been answered, but one or two follow-ups. One, I was wondering if you could give us a little color on what Mike Linenberg was asking earlier about Central America, the kind of fifth and sixth freedom or however you're planning to handle Costa Rico to US, at least Central America to US flying, what we might expect there in terms of timeline.

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Enrique Beltranena, Controladora Vuela Compania de Aviacion SAB de CV - CEO [56]

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We have planned to start an operation probably to the US by the end of the second quarter or beginning of the third quarter, so we do have a lot of time until we get there. We cannot provide, as I said, because we are in the middle of this legal discussion, and we haven't filed our answer, okay, but it is something that we clearly have a B way of doing it or a C way of doing it, and we are not concerned about it. We also think that this is important to say, that we started the year with one route, and now we have five routes within Central America. We will have by the end of the third quarter almost 14 routes, so don't worry.

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Stephen Trent, Citigroup - Analyst [57]

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Okay, very helpful, Enrique. And just one more question. I was wondering if I could get your thoughts regarding Mexican aviation authorities potentially relaxing fine ownership restrictions on Mexican airlines. It seems, from what I can tell, not such a big deal for you guys, given your holding company structure. But any thoughts around that with respect to implications for you or your competitors?

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Enrique Beltranena, Controladora Vuela Compania de Aviacion SAB de CV - CEO [58]

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No, not really. I think the Company structure when we launched the IPO is a structure that has been working pretty well in terms of investments. But they are talking about moving that level from 25% to 49%, and so something makes it easier.

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Stephen Trent, Citigroup - Analyst [59]

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Okay, very helpful. Let me leave it there and thank you again Enrique and team.

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Enrique Beltranena, Controladora Vuela Compania de Aviacion SAB de CV - CEO [60]

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No, thank you very much to you, Steve, and thank you very much for everybody for being in this call. I really appreciate your questions, your participation, the interest in the Company. And I remind you guys that we feel cautiously optimistic of I think an improvement from one quarter to the other of 10 percentage points in the EBITDAR level. It's something impressive. So thank you very much for being here and stick to us.

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Operator [61]

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Ladies and gentlemen, this concludes today's conference. You may now disconnect your lines.