Controladora Vuela (Volaris) — FY2019 Form 20-F
Reporting period: Fiscal year ended December 31, 2019; the filing is an annual report, not a standalone fourth-quarter report. It does not provide a clear standalone Q4 financial result. Financial statements are audited under IFRS. Unless noted, amounts below are Mexican pesos (Ps.) and financial statement amounts are in billions.
Business context and financial performance
Volaris is a Mexican ultra-low-cost airline serving domestic Mexico, the United States and Central America. It expanded its fleet to 82 aircraft and capacity by 16.6% in 2019. Comparatives for 2017–2018 were retrospectively adjusted for IFRS 16 lease accounting.
| Metric | 2019 | Prior comparable period / change |
|---|---|---|
| Operating revenue | Ps. 34.75bn | Ps. 27.31bn in 2018; +27.3% |
| Operating income | Ps. 4.36bn | Ps. 0.53bn in 2018; operating margin about 12.5% versus about 2.0% |
| Net income (loss) | Ps. 2.64bn | Ps. (0.94)bn in 2018 |
| Operating cash flow | Ps. 9.51bn | Ps. 6.28bn in 2018 |
| Investing cash flow | Ps. (1.88)bn | Ps. (1.39)bn in 2018 |
| Financing cash flow | Ps. (5.24)bn | Ps. (5.95)bn in 2018 |
| Cash and cash equivalents at year-end | Ps. 7.98bn | Ps. 5.86bn at year-end 2018 |
| Total assets / equity | Ps. 63.30bn / Ps. 5.53bn | Ps. 56.72bn / Ps. 2.71bn at year-end 2018 |
| Financial debt | About Ps. 5.0bn | Up from about Ps. 3.5bn at year-end 2018 |
| Lease liabilities | Ps. 40.52bn | Ps. 39.57bn at year-end 2018 |
Operating metrics and changes
- Booked passengers rose 19.5% to 21.98 million; available seat miles (ASMs) increased 16.6%, and load factor reached 86% from 85%.
- Fare revenue increased 25.1% and other passenger revenue rose 33.9%. Average fare revenue per booked passenger grew 4.8%; other passenger revenue per booked passenger rose 12.1% to Ps. 481.
- Fuel expense increased 14.7% to Ps. 11.63bn, reflecting 4.1% higher average fuel cost per gallon and 10.7% greater fuel consumption. Fuel represented approximately 38% of operating costs.
- Operating expenses rose 13.5% to Ps. 30.40bn, slower than revenue growth. CASM declined to 124.3 from 127.4 cents; CASM excluding fuel fell to 76.6 from 79.2 cents. TRASM increased to 142.2 from 130.0 cents.
- The year-over-year improvement in operating and net income also reflects accounting presentation under IFRS 16 and, for net income, a Ps. 1.44bn foreign-exchange gain, compared with a Ps. 0.10bn loss in 2018. The peso appreciated 4.3% against the U.S. dollar during 2019.
Liquidity, obligations and accounting items
- Current assets were Ps. 12.12bn against short-term liabilities of Ps. 17.32bn, a negative working-capital position of about Ps. 5.21bn. Management identified operating cash flow and cash reserves as primary liquidity sources.
- Financial debt was about Ps. 5.0bn; 67% of outstanding financial debt and all aircraft lease payments were U.S.-dollar denominated. Aircraft and engine lease liabilities totaled Ps. 40.52bn.
- Total contractual future payments disclosed were Ps. 148.30bn, including debt, lease liabilities, future lease payments and aircraft/equipment purchase obligations. Aircraft and related purchase commitments alone totaled Ps. 82.83bn.
- Volaris adopted IFRS 16 retrospectively, bringing leases onto the balance sheet. At January 1, 2017, adoption recognized Ps. 23.50bn of right-of-use assets and Ps. 32.71bn of lease liabilities; it also changed the presentation of operating results and cash flows.
- Operating cash flow increased partly because unearned transportation revenue rose. Investing outflows included aircraft pre-delivery payments and equipment, parts and maintenance expenditure. Financing outflows included Ps. 6.50bn of lease-liability principal payments.
- The auditor issued unqualified opinions on the financial statements and internal controls. Critical audit matters included lease-return provisions, lease accounting, maintenance-deposit recoverability and the assessment of COVID-19’s effect on going concern.
Outlook, risks and unusual developments
- The filing provides no conventional quantified financial guidance. Management described continued growth, fleet expansion, low fares and ancillary-revenue development as strategic priorities; 103 Airbus aircraft were scheduled for delivery through 2026, subject to the disclosed commitments and risks.
- COVID-19 materially affected the outlook after year-end. Volaris reported planned ASM reductions of about 80% in April 2020 and 90% in May, route suspensions, deferred or cancelled non-essential spending, supplier-payment deferrals and other cost reductions. Management said the ultimate financial effect could not yet be quantified.
- By April 27, 2020, the peso had weakened to Ps. 24.623 per U.S. dollar from Ps. 18.8452 at year-end 2019, a reported depreciation of 30.7%. This creates material currency exposure given U.S.-dollar costs, debt and lease obligations.
- Fuel-price volatility, intense fare competition, Mexico’s economic conditions, airport slots and concentration in major airports, supplier dependence, aircraft/engine delivery or reliability issues, labor matters and regulatory requirements are material business risks. Approximately 20% of projected 2020 fuel needs was hedged at year-end 2019; hedges may not fully protect costs and can create losses or collateral needs.
- The Mexican domestic-air-service concession was renewed in February 2020 for 20 years beginning May 9, 2020. The company reported no material legal proceedings and said it was current on debt payments and in compliance with financing covenants at year-end 2019.
- No cash dividend was paid in 2019, and the company said it did not expect to pay dividends in the foreseeable future.
Most important facts for investors to verify
- Review the audited IFRS statements and reconcile the reported earnings improvement with IFRS 16, foreign-exchange gains, sale-and-leaseback gains and changes in operating costs.
- Assess post-year-end liquidity and cash burn against the negative working-capital position, lease payments, debt maturities and aircraft purchase commitments, including the effects of COVID-19 capacity cuts.
- Verify the sensitivity of results and liquidity to peso depreciation, fuel prices, interest rates and the availability of fuel and aircraft financing.
- Track the pace and funding of aircraft deliveries, lease-return obligations, maintenance deposits and expected fleet maintenance costs.
- Check subsequent disclosures for actual traffic, capacity, revenue, cash and covenant developments; the filing states that COVID-19’s impact was not yet quantifiable.