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, 2014
Accounting Basis: International Financial Reporting Standards (IFRS)
Business Overview: Volaris is an ultra-low-cost carrier (ULCC) based in Mexico. As of December 31, 2014, it operated a fleet of 50 Airbus A320 family aircraft, serving 53 airports across Mexico and the United States. The company focuses on VFR (visiting friends and relatives) and leisure travelers, utilizing an unbundled fare structure to generate significant non-ticket revenue.
Key Financial Metrics (Year Ended Dec 31, 2014)
| Metric | Amount (MXN Millions) | Amount (USD Millions) |
|---|---|---|
| Total Operating Revenue | 14,036.7 | 953.7 |
| Passenger Revenue | 11,303.3 | 768.0 |
| Non-Ticket Revenue | 2,733.4 | 185.7 |
| Operating Income | 204.1 | 13.9 |
| Net Income | 605.2 | 41.1 |
| EBITDA | 995.3 | 67.6 |
| Adjusted EBITDAR | 3,081.1 | 209.3 |
| Cash and Cash Equivalents | 2,264.9 | 153.9 |
| Total Debt (Short & Long Term) | 5,435.3 | 369.3 |
Note: USD conversions are based on the period-end rate of Ps.14.7180 per USD. Debt figures include significant operating lease obligations not reflected on the balance sheet as debt.
Material Changes vs. Prior Period (2013)
- Revenue Growth: Total operating revenue increased 8.0% to Ps.14,036.7 million. This was driven by a 45.0% surge in non-ticket revenue (to Ps.2,733.4 million) due to higher passenger volumes and successful unbundling strategies, partially offset by a 7.3% decrease in average ticket revenue per passenger.
- Operating Income Decline: Despite revenue growth, operating income decreased 35.7% to Ps.204.1 million. This was primarily due to a 15.9% increase in aircraft and engine rent expenses (driven by new aircraft additions and peso depreciation) and a 16.2% increase in maintenance costs.
- Net Income Surge: Net income more than doubled to Ps.605.2 million (from Ps.265.3 million in 2013). This significant increase was largely attributable to a Ps.448.7 million foreign exchange gain resulting from the 12.6% depreciation of the Mexican peso against the U.S. dollar, as the company maintained a net U.S. dollar asset position.
- Cost Structure: Fuel costs remained the largest operating expense at 39% of total operating costs. CASM (Cost per Available Seat Mile) increased slightly to Ps.1.17 (USD 0.79), while CASM ex-fuel increased to Ps.0.72 (USD 0.05).
Guidance, Outlook, and Risks
Management Commentary & Outlook:
- Growth Strategy: Volaris plans to continue expanding its fleet with firm commitments for 59 Airbus A320 family aircraft (including NEO models) to be delivered over the next five years. The company aims to phase out A319s by 2019 in favor of higher-density A320s and A321s.
- Market Expansion: The company intends to stimulate demand by maintaining low base fares and expanding non-ticket revenue streams (e.g., V-Club membership, affinity credit cards, cargo).
- Dividend Policy: The company does not intend to pay cash dividends in the foreseeable future, preferring to retain earnings to finance operations and growth.
- Currency Fluctuation: Approximately 68% of operating costs are U.S. dollar-denominated, while revenues are primarily in pesos. Further peso depreciation could adversely affect operating margins if fares cannot be adjusted.
- Fuel Price Volatility: Fuel is the largest cost component. The company hedges a portion of its fuel requirements (39% for 2015), but remains exposed to global price spikes.
- Fixed Obligations: The airline has significant fixed obligations, including operating lease payments totaling approximately USD 1.1 billion over the next 12 years. Failure to meet these could lead to aircraft repossession.
- Regulatory & Political: Risks include potential revocation of the operating concession, changes in Mexican aviation laws, and political instability in Mexico.
- Legal Proceedings: A putative class action lawsuit was filed in February 2015 regarding the 2013 IPO, alleging misstatements about competitive outlook and revenue recognition.
Investor Verification Checklist
- Exchange Rate Sensitivity: Verify the impact of the 12.6% peso depreciation on the reported net income, noting that a significant portion of the profit was a non-operating foreign exchange gain.
- Lease Obligations: Review the off-balance sheet operating lease commitments (approx. USD 1.1 billion) to assess liquidity risks, as the company relies heavily on operating cash flows to service these fixed costs.
- Non-Ticket Revenue Sustainability: Assess the durability of the 45% growth in non-ticket revenue, which is critical to the ULCC business model, and monitor for regulatory changes regarding unbundled fees.
- Fleet Expansion Costs: Confirm the availability of financing for the 59 aircraft on order and the associated pre-delivery payment obligations.
- Legal Exposure: Monitor the status of the IPO securities litigation filed in the Southern District of New York.