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, 2015
Accounting Standards: International Financial Reporting Standards (IFRS)
Business Overview: Volaris is an ultra-low-cost carrier (ULCC) based in Mexico, operating a uniform fleet of Airbus A320 family aircraft. The company serves domestic routes in Mexico and international routes to the United States and Central America, targeting leisure, visiting friends and relatives (VFR), and cost-conscious business travelers.
Key Financial Metrics (Year Ended Dec 31, 2015)
| Metric | Amount (MXN Thousands) | Amount (USD Thousands) |
|---|---|---|
| Total Operating Revenues | 18,179,704 | 1,056,561 |
| Operating Income | 2,510,333 | 145,896 |
| Net Income | 2,463,870 | 143,197 |
| EBITDA | 3,933,604 | 228,613 |
| Adjusted EBITDA | 2,967,050 | 172,439 |
| Cash and Cash Equivalents | 5,157,313 | 299,731 |
| Total Liabilities | 8,436,134 | 490,289 |
| Total Equity | 6,824,831 | 396,642 |
Note: USD conversions are based on the period-end exchange rate of Ps.17.2065 per USD.
Operating Performance Metrics
- Passengers Booked: 11.98 million (22.2% increase vs. 2014)
- Load Factor: 82.3%
- Aircraft Fleet: 56 aircraft (Average age: 4.6 years)
- Cost per Available Seat Mile (CASM): Ps.111.5 cents (USD 6.5 cents)
- Fuel Cost per Gallon: Ps.28.8 (USD 1.7 cents)
Material Changes vs. Prior Period
Revenue Growth: Total operating revenues increased 29.5% to Ps.18.2 billion. Passenger revenue grew 25.0% driven by a 18.8% increase in capacity (ASMs) and a 2.5% increase in average ticket revenue per passenger. Non-ticket revenue surged 48.1% to Ps.4.0 billion, reflecting higher ancillary sales per passenger.
Profitability Surge: Operating income jumped over 1,000% to Ps.2.5 billion. This was primarily driven by a 12.0% decrease in fuel expenses (due to lower global fuel prices) and significant foreign exchange gains.
Foreign Exchange Impact: The company recorded a net foreign exchange gain of Ps.966.6 million (USD 56.2 million) due to the 16.9% depreciation of the Mexican peso against the U.S. dollar. Volaris maintained a net asset position in U.S. dollars, largely due to aircraft maintenance deposits paid to lessors.
Expense Increases: While fuel costs dropped, aircraft and engine rent expense increased 39.1% due to fleet expansion and the peso's depreciation. Salaries and benefits rose 20.7% to support fleet growth.
Guidance, Outlook, and Risks
Outlook and Strategy: Management intends to continue its growth strategy by expanding its fleet with 59 firm commitments for Airbus A320 family aircraft (including NEO models) to be delivered through 2020. The company plans to maintain its low-cost structure to stimulate demand and shift bus passengers to air travel.
Key Risks:
- Currency Fluctuation: Approximately 67% of operating costs are U.S. dollar-denominated, while revenues are primarily in pesos. Further peso depreciation could adversely affect margins if not offset by fare adjustments.
- Fuel Price Volatility: Fuel is the largest operating expense. While prices dropped in 2015, future volatility remains a significant risk.
- Regulatory and Political: Risks include changes in Mexican federal policies, potential fare regulations by the SCT, and the renewal of the company's operating concession.
- Fixed Obligations: The company has significant fixed obligations, including operating lease payments totaling approximately USD 1.2 billion over the next 12 years.
- Legal Proceedings: The company is a defendant in a putative class action lawsuit regarding its 2013 IPO, alleging misstatements regarding non-ticket revenue recognition.
Investor Verification Checklist
- Exchange Rate Sensitivity: Verify the impact of the peso's depreciation on future earnings, given the high proportion of USD-denominated costs (fuel, leases) versus peso-denominated revenues.
- Fleet Expansion Costs: Confirm the funding sources for the 59 aircraft on order and the associated pre-delivery payment obligations.
- Non-Ticket Revenue Sustainability: Assess the durability of the 48% growth in ancillary revenues and potential regulatory risks regarding unbundled fees.
- Legal Exposure: Monitor the status of the IPO securities litigation and potential settlement costs.
- Concession Renewal: Verify the timeline and requirements for renewing the Mexican government concession required to operate domestic services.