Controladora Vuela (Volaris) — FY2017 Form 20-F
Reporting period: Fiscal year ended December 31, 2017; this is an annual report, not a standalone Q4 filing. Financial statements are audited and prepared under IFRS. Amounts below are in Mexican pesos unless stated otherwise.
Business context and key metrics
Volaris is a Mexican ultra-low-cost airline serving Mexico, the United States and Central America. It operated 71 aircraft and served 69 airports at year-end. It relies on low base fares and ancillary revenue, with passenger revenue still its largest revenue source.
| Metric | 2017 | 2016 |
|---|---|---|
| Operating revenue | Ps.24.85bn (+5.7%) | Ps.23.51bn |
| Passenger revenue | Ps.17.79bn (approximately flat) | Ps.17.79bn |
| Non-ticket revenue | Ps.7.05bn (+23.3%); 28% of revenue | Ps.5.72bn; 24% of revenue |
| Operating income / margin | Ps.18.6m / approximately 0.1% | Ps.2.74bn / approximately 11.7% |
| Net income (loss) | Ps.(594.6)m | Ps.3.52bn |
| Operating cash flow | Ps.985.9m | Ps.978.7m |
| Cash and cash equivalents at year-end | Ps.6.95bn | Ps.7.07bn |
| Financial debt | Ps.3.48bn | Ps.1.99bn |
Material changes and financial position
- Capacity, measured in ASMs, grew 12.9%; booked passengers rose 9.5%, while load factor declined from about 86% to 84%. Average ticket revenue per booked passenger fell 8.6%, to Ps.1,086. Non-ticket revenue per booked passenger increased 12.6%, to Ps.429.
- Operating expenses rose 19.5%, substantially faster than revenue. Fuel expense increased 26.4%, including an 18.1% increase in average economic fuel cost per gallon. CASM rose to 131.6 Ps. cents from 124.4, while TRASM fell to 131.7 Ps. cents from 140.8.
- Foreign exchange swung to a Ps.793.9m loss from a Ps.2.17bn gain in 2016, reflecting peso appreciation and Volaris’s net U.S.-dollar asset position. Operating income also contracted sharply. The company reported a Ps.161.2m income-tax benefit in 2017.
- Cash from investing was a Ps.2.26bn outflow, principally for aircraft pre-delivery payments and other capital expenditures; financing provided Ps.1.40bn. Cash declined Ps.120.4m during the year. Current assets of Ps.11.31bn exceeded current liabilities of Ps.9.37bn.
- Financial debt increased, with Ps.2.40bn classified as short-term and Ps.1.08bn long-term. Separately, the filing reports Ps.36.65bn of operating-lease obligations and Ps.22.17bn of aircraft, engine and related purchase commitments. Operating leases were off balance sheet under the accounting applied in 2017.
Outlook, risks and unusual items
- No formal 2018 revenue or earnings guidance is provided. Management estimated 2018 maintenance and related amortization expense of approximately Ps.2.1bn and capital expenditures, excluding aircraft pre-delivery payments, of approximately Ps.2.1bn.
- Volaris reported hedges covering approximately 55% of projected 2018 fuel requirements. Fuel remains a major exposure: it represented 29% of 2017 operating costs. Approximately 71% of operating costs were U.S.-dollar-linked or denominated, compared with 40% of collections in U.S. dollars.
- The company planned substantial fleet expansion, including Airbus aircraft deliveries through 2026. It disclosed worldwide technical and production issues with Pratt & Whitney PW1100G-JM engines, which affected NEO aircraft availability and delayed deliveries. A codeshare agreement with Frontier, signed in January 2018, remained subject to regulatory approval.
- Management cited U.S. immigration policies as having negatively affected 2017 U.S.–Mexico travel, particularly VFR and leisure demand. Other principal risks include fuel-price volatility, peso movements, competition and fare pressure, airport access and slots, fixed lease commitments, rising maintenance needs, labor and regulatory matters, and dependence on key suppliers.
- COFECE issued a preliminary antitrust ruling in January 2018 concerning alleged conduct by several Mexican carriers during 2008–2010. It was not a final finding; Volaris recorded no provision and said any fine under the then-applicable law was not expected to be material, while noting the outcome could not be predicted.
- Volaris expected IFRS 15 adoption in 2018 to change the timing and classification of certain ancillary revenues, with no material overall financial effect expected. It anticipated a significant balance-sheet effect from IFRS 16 lease accounting, effective in 2019.
- The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective. The filing reports no defaults or dividend arrearages and no cash dividends paid.
Important facts for investors to verify
- Whether revenue and passenger growth can recover margins after 2017’s cost increases and lower average ticket revenue.
- The composition, maturity and funding needs of financial debt, operating leases, aircraft commitments and pre-delivery payments.
- The sensitivity of earnings and cash flow to fuel prices, peso movements and the effectiveness and coverage of fuel hedges.
- The operational and financial effects of PW1100G-JM engine issues, aircraft delivery delays, and planned fleet growth.
- The status and potential consequences of the COFECE proceeding, and the actual effects of IFRS 15 and IFRS 16 adoption.