Controladora Vuela Compania De Aviacion, S.A.B. De C.V. annual report, Q4 FY2018

Business context and reporting period

Controladora Vuela Compañía de Aviación, S.A.B. de C.V. (Volaris) filed this Form 20-F for the fiscal year ended December 31, 2018. It is an annual report, not a standalone fourth-quarter filing; the supplied filing text does not provide clear Q4-only financial results. The audited consolidated statements are prepared under IFRS as issued by the IASB. Amounts below are Mexican pesos (Ps.) unless noted; U.S. dollar conversions are for convenience.

Volaris operates an ultra-low-cost airline focused on Mexico, the United States and Central America. At year-end it had 77 aircraft, served 69 airports, and carried 18.4 million booked passengers. Passenger revenue represented about 97% of total operating revenue.

Financial and operating results

Metric	2018	2017
Operating revenue	Ps. 27.305bn	Ps. 24.788bn
Operating expenses, net	Ps. 28.186bn	Ps. 24.827bn
Operating income (loss)	Ps. (880.5)m	Ps. (38.5)m
Net income (loss)	Ps. (682.5)m	Ps. (651.8)m
Operating cash flow	Ps. 565.8m	Ps. 985.9m
Cash and cash equivalents, year-end	Ps. 5.863bn	Ps. 6.951bn

• Revenue rose 10.2%, while net operating expenses increased 13.5%; the operating loss widened. Operating margin was approximately (3.2%) versus (0.2%) in 2017; net margin was approximately (2.5%) versus (2.6%).
• Fare revenue increased 3.9% to Ps. 18.488bn. Other passenger revenue grew 29.4% to Ps. 7.892bn; non-passenger revenue was about Ps. 924.8m.
• Fuel expense increased 39.7% to Ps. 10.135bn, driven by a 29.2% rise in average economic fuel cost per gallon and higher consumption. Fuel was approximately 36% of operating costs.
• Finance income was Ps. 152.6m, finance cost Ps. 120.3m, and net foreign-exchange loss Ps. 72.5m. A Ps. 238.2m income-tax benefit contributed to the net loss.
• Cash used in investing activities was Ps. 1.389bn and cash used in financing activities was Ps. 235.2m. Investing outflows included aircraft and engine pre-delivery payments, net of reimbursements.
• Year-end total assets were Ps. 22.311bn, total liabilities Ps. 13.139bn and equity Ps. 9.172bn. Current assets of Ps. 9.190bn were slightly below current liabilities of Ps. 9.249bn.
• Financial debt was approximately Ps. 3.523bn, with 87% of financial debt denominated in U.S. dollars. The company also disclosed Ps. 45.955bn of future operating lease payments under the then-applicable accounting presentation and Ps. 21.064bn of aircraft, engine and related purchase commitments.
• Key airline metrics: ASMs rose 11.4%, booked passengers 12.0%, and load factor was reported at 85% (84% in 2017, rounded). Average ticket revenue per booked passenger fell 7.4%; ancillary revenue per passenger rose 12.5%. CASM increased to 134.2 cents from 131.6, while CASM excluding fuel improved to 85.9 cents from 93.2.

Material changes versus the prior comparable period

• Revenue growth was outpaced by expense growth, principally because of higher fuel costs, increased airport and navigation charges, and expanded operations. Operating results deteriorated sharply from a near break-even loss in 2017.
• Cash declined by Ps. 1.088bn, and operating cash flow fell by Ps. 420.1m. Investing cash outflow was lower than in 2017, while financing cash flow shifted from a Ps. 1.398bn inflow to a Ps. 235.2m outflow.
• Other passenger revenue continued to gain importance as the company expanded ancillary sales. IFRS 15 was adopted retrospectively from January 1, 2018, changing the timing and classification of certain ancillary revenues; 2016 and 2017 comparisons were recast.
• Volaris added six net aircraft during 2018 and reported 35 new routes. Sale-and-leaseback gains recorded as other operating income were Ps. 609.2m, compared with Ps. 65.9m in 2017; despite this benefit, the company reported an operating loss.

Outlook, commentary, risks and unusual items

• The filing gives no formal quantified revenue or earnings guidance. It forecasts 2019 capital expenditures of Ps. 1.6bn excluding aircraft pre-delivery payments and estimates 2019 maintenance expense and related amortization at approximately Ps. 2bn.
• Management’s stated strategy is to grow routes and fleet while keeping fares low, increasing ancillary revenue and maintaining high aircraft utilization. The company had hedged approximately 18% of projected 2019 fuel requirements at year-end 2018.
• Volaris disclosed plans to receive 106 Airbus A320-family aircraft through 2026 under purchase commitments, alongside leased aircraft deliveries and associated pre-delivery payments. P&W PW1100G-JM engine technical and production issues had caused aircraft unavailability and delayed NEO deliveries.
• IFRS 16 became effective January 1, 2019. The company estimated that, at December 31, 2018, retrospective application would recognize approximately Ps. 31.986bn of right-of-use assets and Ps. 39.464bn of lease liabilities. This materially changes reported assets, liabilities, operating profit and financing costs; the filing’s transition estimates should be checked against the eventual adopted statements.
• Major risks include fuel-price volatility and limited hedging, peso/U.S. dollar exposure, intense fare competition, reliance on ancillary income, substantial aircraft lease and purchase commitments, liquidity dependence on operating cash flows, and concentration at key airports including slot-constrained Mexico City. Approximately 73% of operating costs and 38% of collections were U.S.-dollar-linked or denominated.
• The company relied heavily on ASA as its domestic fuel supplier; its agreement was due to expire in June 2019. Volaris requested a 30-year extension of its Mexican operating concession on April 3, 2019. The filing describes both as matters requiring follow-up.
• After year-end, on March 28, 2019, COFECE notified Volaris that it would impose no liability in its investigation of alleged historic antitrust activity. Management stated that disclosure controls and internal control over financial reporting were effective; the auditor gave unqualified opinions on the financial statements and internal controls.

Most important facts for investors to verify

1. Review the audited statements and notes for the exact treatment and comparability of IFRS 15, and verify the eventual IFRS 16 adoption impact, especially lease liabilities and lease-related expenses.
2. Reconcile cash, available credit lines, debt maturities, covenant compliance and the substantial lease and aircraft purchase commitments; assess liquidity against the decline in operating cash flow.
3. Track fuel prices, hedge coverage and outcomes, ASA contract renewal or replacement, and peso movements given the company’s U.S.-dollar cost and liability exposure.
4. Monitor fleet delivery timing and P&W engine availability, maintenance-cost progression, airport slots and concession renewal status.
5. Assess whether passenger growth and ancillary revenue can offset lower ticket revenue per passenger and rising unit costs without further margin deterioration.