Business Context and Reporting Period
Company: Controladora Vuela Compania De Aviacion, S.A.B. De C.V. (Volaris)
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2016
Accounting Basis: International Financial Reporting Standards (IFRS)
Business Overview: Volaris is an ultra-low-cost carrier (ULCC) based in Mexico. As of December 31, 2016, the company operated a fleet of 69 Airbus A320 family aircraft, serving 65 airports across Mexico, the United States, and Central America. The company focuses on VFR (visiting friends and relatives), leisure, and cost-conscious business travelers.
Key Financial Metrics (Year Ended Dec 31, 2016)
| Metric | Amount (MXN Millions) | Amount (USD Millions) |
|---|---|---|
| Total Operating Revenues | 23,512.5 | 1,137.8 |
| Operating Income | 2,739.7 | 132.6 |
| Net Income | 3,519.5 | 170.3 |
| EBITDA | 5,445.7 | 263.5 |
| Adjusted EBITDA | 3,276.2 | 158.5 |
| Cash and Cash Equivalents | 7,071.3 | 342.2 |
| Total Liabilities | 10,987.7 | 531.7 |
| Financial Debt | ~2,000.0 | ~96.8 |
Note: USD conversions are based on the period-end rate of Ps. 20.6640 per USD as stated in the filing.
Operational Highlights
- Passenger Revenue: Ps. 17,790.1 million (76% of total revenue).
- Non-Ticket Revenue: Ps. 5,722.3 million (24% of total revenue), driven by ancillary fees.
- Load Factor: 86% (up from 82% in 2015).
- Aircraft Utilization: 12.80 block hours per day.
- CASM (Cost per Available Seat Mile): Ps. 124.4 cents (USD 6.0 cents), the lowest among Latin American publicly traded airlines.
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased 29.3% year-over-year (YoY) to Ps. 23.5 billion, driven by a 25.9% increase in passenger revenue and a 41.3% increase in non-ticket revenue.
- Profitability: Operating income rose 9.1% to Ps. 2.7 billion. Net income increased 42.8% to Ps. 3.5 billion.
- Foreign Exchange Impact: The company recorded a significant net exchange gain of Ps. 2.2 billion (USD 105.0 million) due to the 20.1% depreciation of the Mexican peso against the U.S. dollar, as the company maintained a net U.S. dollar asset position of USD 584.5 million.
- Expense Increases: Total operating expenses increased 32.6% YoY. Notable increases included Aircraft and engine rent expense (up 58.6%) and Maintenance expenses (up 53.7%), largely due to fleet expansion (13 new net aircraft added) and peso depreciation affecting dollar-denominated costs.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Growth Strategy: Volaris plans to continue disciplined fleet growth with firm commitments for 45 Airbus A320 family aircraft (including NEO models) for delivery through 2020.
- Market Expansion: The company aims to stimulate demand by maintaining low base fares and expanding non-ticket revenue streams. It recently began operations in Costa Rica (Vuela Aviación) in December 2016.
- Capital Allocation: The company intends to retain earnings to finance operations and growth; no cash dividends are expected in the foreseeable future.
Risk Factors and Contingencies
- Currency Risk: Approximately 69% of operating costs are U.S. dollar-linked. Further peso depreciation could adversely affect operating margins if fares cannot be adjusted.
- Fuel Costs: Fuel is the largest operating expense (28% of total costs in 2016). The company hedges a portion of future fuel requirements but remains exposed to price volatility.
- Regulatory and Political: Risks include changes in Mexican federal policies, potential renegotiation of NAFTA, and U.S. immigration policies which have already negatively impacted VFR travel behavior.
- Fixed Obligations: The company has significant fixed obligations, including operating lease payments totaling approximately USD 1.7 billion over the next 14 years.
- Legal Proceedings: A putative class action lawsuit regarding the 2013 IPO was dismissed with prejudice in August 2016; no appeal was filed.
Investor Verification Checklist
- Exchange Rate Sensitivity: Verify the impact of the peso's depreciation on future USD-denominated lease and fuel costs versus peso-denominated revenue.
- Fleet Delivery Schedule: Confirm the timing and financing of the 45 committed Airbus aircraft deliveries through 2020.
- Non-Ticket Revenue Sustainability: Assess the growth trajectory of ancillary revenues (baggage, seat selection) and potential regulatory changes affecting unbundled pricing.
- Liquidity Position: Review the adequacy of cash reserves (Ps. 7.1 billion) against upcoming pre-delivery payments and lease obligations.
- U.S. Market Exposure: Monitor the impact of U.S. immigration policies on the VFR segment, which constitutes a significant portion of the customer base.