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, 2013
Accounting Standards: International Financial Reporting Standards (IFRS)
Business Overview: Volaris is an ultra-low-cost carrier (ULCC) based in Mexico. As of December 31, 2013, the company operated a fleet of 44 Airbus A320 family aircraft, serving 46 airports across Mexico and the United States. The company completed a dual-listing initial public offering (IPO) on the NYSE and Mexican Stock Exchange in September 2013.
Key Financial Metrics (Year Ended Dec 31, 2013)
| Metric | Value (MXN Millions) | Value (USD Millions) |
|---|---|---|
| Total Operating Revenues | 13,002.5 | 994.3 |
| Operating Income | 317.4 | 24.3 |
| Net Income | 265.3 | 20.3 |
| Net Income Attributable to Parent | 268.7 | 20.5 |
| EBITDA | 685.3 | 52.4 |
| Adjusted EBITDAR | 2,806.2 | 214.6 |
| Cash and Cash Equivalents | 2,450.8 | 187.4 |
| Total Assets | 8,377.8 | 640.7 |
| Total Liabilities | 4,415.4 | 337.7 |
| Total Equity | 3,962.4 | 303.0 |
Note: USD conversions are based on the rate of Ps.13.0765 per USD as of December 31, 2013.
Operating Performance Metrics
- Passenger Revenue: Ps.11,117.3 million (86% of total revenue).
- Non-Ticket Revenue: Ps.1,885.1 million (14% of total revenue), driven by ancillary fees.
- Load Factor: 83%.
- Available Seat Miles (ASMs): 10,899.5 million.
- Cost per Available Seat Mile (CASM): Ps.1.164 (USD 0.089), reported as the lowest among Latin American publicly traded airlines.
- Fuel Cost: Ps.5,085.8 million (40% of total operating costs).
Material Changes vs. Prior Period (2012)
- Revenue Growth: Total operating revenues increased 11.3% to Ps.13,002.5 million, driven by a 9.2% increase in passenger revenue and a 24.9% increase in non-ticket revenue.
- Passenger Volume: Booked passengers increased 20.7% to 8.94 million; Revenue Passenger Miles (RPMs) increased 17.4%.
- Operating Income Decline: Despite revenue growth, operating income decreased 16.1% to Ps.317.4 million. This was primarily due to a 12.2% increase in total operating expenses, outpacing revenue growth.
- Expense Drivers:
- Fuel: Increased 7.5% due to higher fuel consumption (15% increase in gallons) despite a lower average cost per gallon.
- Rent Expense: Aircraft and engine rent increased 16.0% due to the addition of new aircraft and engines.
- Salaries: Increased 20.0% due to operational growth and variable compensation.
- Depreciation: Increased 42.9% due to amortization of major maintenance events.
- Net Income: Increased 30.5% to Ps.265.3 million, largely aided by a net foreign exchange gain of Ps.66.4 million (compared to a loss of Ps.95.3 million in 2012) resulting from the company's net U.S. dollar asset position.
- Liquidity: Cash and cash equivalents increased significantly by Ps.1,628.7 million to Ps.2,450.8 million, bolstered by net IPO proceeds of approximately Ps.2,578.2 million.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Growth Strategy: Volaris plans to continue expanding its fleet with firm commitments for 64 Airbus A320 family aircraft (including NEO models) to be delivered through 2020. The company aims to phase out A319s by 2019.
- Market Expansion: Focus remains on stimulating demand in existing markets and entering new routes, particularly targeting VFR (Visiting Friends and Relatives) and leisure travelers in Mexico and the U.S.
- Cost Structure: Management intends to maintain its ULCC model, leveraging high aircraft utilization and unbundled ancillary revenues to keep base fares low.
- Dividend Policy: The company does not intend to pay cash dividends in the foreseeable future, preferring to retain earnings to finance operations and growth.
Key Risks and Contingencies
- Fuel Price Volatility: Fuel is the largest operating expense (40%). The company hedges a portion of requirements but remains exposed to global price fluctuations.
- Foreign Exchange: Approximately 75% of operating costs are U.S. dollar-denominated, while revenues are primarily in pesos. Depreciation of the peso adversely affects margins.
- Fixed Obligations: The company has significant fixed obligations, including operating lease payments (approx. USD 988.4 million over 12 years) and pre-delivery payments for aircraft.
- Regulatory Environment: Operations depend on maintaining concessions from the Mexican government (SCT) and authorizations from U.S. authorities (FAA/DOT). Revocation of concessions would halt operations.
- Competition: Intense competition from legacy carriers and other low-cost carriers (Interjet, VivaAerobus) in Mexico and U.S. carriers on international routes.
- Labor Relations: Approximately 73% of the workforce is unionized. Future collective bargaining agreements could increase labor costs.
Investor Verification Checklist
- Debt and Lease Obligations: Verify the schedule of future operating lease payments and pre-delivery payment commitments to assess liquidity strain.
- Fuel Hedging Effectiveness: Review the extent of fuel hedging (11.9% for Q1 2014) and the impact of recent fuel price trends on future margins.
- Foreign Exchange Exposure: Monitor the MXN/USD exchange rate, as a significant portion of costs are USD-denominated while revenues are MXN-denominated.
- Regulatory Status: Confirm the status of the company's concession renewal and the permanent granting of international routes previously operated by Grupo Mexicana.
- Capital Expenditures: Track actual capital expenditures against the planned fleet expansion and pre-delivery payment financing.
- Non-Ticket Revenue Sustainability: Assess the growth trajectory of ancillary revenues (baggage, seat selection) to ensure they offset potential fare compression.