Business Context and Reporting Period
Company: Controladora Vuela Compania De Aviacion, S.A.B. De C.V. (Volaris)
Filing Type: Form 6-K (First Quarter 2018 Financial Statements and Press Release)
Reporting Period: Three months ended March 31, 2018
Business Overview: Volaris is an ultra-low-cost carrier serving Mexico, the United States, and Central America. The company operates a fleet of 70 aircraft (as of March 31, 2018) with an average age of 4.8 years. During the quarter, the company adopted IFRS 15 "Revenue from Contracts with Customers," which reclassified certain ancillary fees (e.g., baggage, seat selection) from non-passenger revenue to passenger revenue.
Key Financial Metrics
| Metric (MXN Millions) | Q1 2018 | Q1 2017 (Adjusted) |
|---|---|---|
| Operating Revenues | 5,850 | 5,699 |
| Operating Expenses | 6,757 | 6,428 |
| Operating Loss | (906) | (729) |
| Net Loss | (1,118) | (1,318) |
| Loss Per Share (Basic) | (1.11) | (1.30) |
| Operating Cash Flow | 1,093 | 469 |
| Cash and Cash Equivalents (End of Period) | 7,317 | 6,839 |
| Total Debt (Short + Long Term) | 3,423 | 3,483 |
Unit Metrics:
- TRASM (Total Revenue per ASM): 115.7 cents (down 7.7% YoY)
- CASM (Cost per ASM): 133.7 cents (down 5.4% YoY)
- CASM ex-fuel: 90.6 cents (down 9.1% YoY)
- Average Fuel Cost: Ps. 40.1 per gallon (up 8.0% YoY)
- Load Factor: 82.2% (down 1.0 percentage points YoY)
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 2.7% year-over-year, driven by a 7.5% increase in booked passengers (4.3 million) and a 17.4% increase in total ancillary revenues.
- Profitability Improvement: While the company reported a net loss of Ps. 1,118 million, this represented a 15.2% improvement compared to the Ps. 1,318 million loss in Q1 2017. The net loss margin improved to 19.1% from 23.1%.
- Cost Management: Operating expenses increased 5.1% YoY, primarily due to an 8.0% increase in average fuel costs. However, CASM ex-fuel decreased 9.1%, reflecting effective cost controls and the appreciation of the Mexican peso (average rate Ps. 18.76 vs. Ps. 20.39 in Q1 2017).
- Foreign Exchange Impact: The company recorded a net foreign exchange loss of Ps. 691 million due to its net monetary asset position in U.S. dollars, despite the peso appreciating 8.0% year-over-year.
- Accounting Change: Adoption of IFRS 15 reclassified approximately Ps. 1.65 billion of ancillary revenues into passenger revenues, altering the composition of revenue streams without changing total operating revenue.
Guidance, Outlook, and Risks
Management Commentary: CEO Enrique Beltranena highlighted the challenging fare environment in the domestic market due to significant industry capacity increases. Management emphasized that maintaining the lowest unit cost is the primary competitive advantage. The company successfully expanded ancillary revenue, which now represents 34% of total operating revenues.
Operational Outlook:
- Fleet Expansion: The company received its first A321neo aircraft on April 17, 2018, expected to reduce unit costs further.
- Route Expansion: New international routes launched in Q1 2018 include connections between Guatemala City, San Salvador, Los Angeles, and Cancun.
- Codeshare Agreement: A codeshare agreement with Frontier Airlines was signed in January 2018, pending regulatory approval, to expand network access in the U.S. and Mexico.
Risks and Contingencies:
- Antitrust Investigation: The Mexican antitrust authority (COFECE) issued a preliminary ruling of potential responsibility regarding alleged antitrust activities between 2008 and 2010. Management believes any potential fine would not have a material adverse effect, but the outcome remains uncertain.
- Fuel Price Volatility: The company hedges 63% of its fuel consumption using call options. Unhedged exposure remains a risk.
- Foreign Exchange: Significant exposure to USD-denominated expenses (aircraft leases, fuel pricing) creates volatility in financial results relative to the MXN/USD exchange rate.
Investor Verification Checklist
- IFRS 15 Impact: Verify the specific reclassification of ancillary revenues to passenger revenues to ensure accurate trend analysis against historical data.
- Fuel Hedging Effectiveness: Review the details of the Asian call options (strike prices and coverage) to assess protection against future fuel price spikes.
- Antitrust Proceedings: Monitor updates on the COFECE investigation to evaluate potential liability exposure.
- Debt Covenants: Confirm continued compliance with financial covenants under the Santander/Bancomext loan agreement, particularly regarding dividend restrictions.
- Unit Cost Trends: Track CASM ex-fuel performance to validate the sustainability of the cost reduction strategy amidst rising capacity.