Business context and reporting period
Controladora Vuela Compañía de Aviación, S.A.B. de C.V. (Volaris) filed this Form 20-F on April 26, 2022, reporting for the fiscal year ended December 31, 2021. It is an ultra-low-cost airline focused primarily on Mexican domestic and cross-border leisure and visiting-friends-and-relatives traffic. Financial statements are audited and prepared under IFRS as issued by the IASB. Unless indicated otherwise, amounts below are in Mexican pesos (Ps.).
Financial and operating performance
- Revenue: Ps.44.66 billion, up more than 100% from Ps.22.16 billion in 2020. Passenger revenue was Ps.43.30 billion; non-passenger revenue, including cargo, was Ps.1.80 billion before Ps.0.43 billion of negative non-derivative financial instrument revenue.
- Profitability: Operating income was Ps.8.07 billion, versus an operating loss of Ps.3.25 billion in 2020; operating margin was about 18%. Net income was Ps.2.12 billion, versus a Ps.4.29 billion net loss; net margin was about 5%. Basic and diluted earnings per share were Ps.1.819.
- Cash flow and liquidity: Operating cash flow was Ps.15.87 billion; investing cash flow was negative Ps.2.73 billion; financing cash flow was negative Ps.8.83 billion. Cash, cash equivalents and restricted cash totaled Ps.15.25 billion at year-end. Management separately cited approximately Ps.15.1 billion of unrestricted cash and cash equivalents. Current assets of Ps.20.15 billion were below current liabilities of Ps.25.76 billion.
- Debt and obligations: Financial debt was Ps.6.28 billion, excluding lease liabilities. Recognized lease liabilities were Ps.49.65 billion. Total liabilities were Ps.75.57 billion and total equity Ps.6.45 billion. The filing also reports Ps.137.45 billion of aircraft, engine and spare-parts purchase obligations and Ps.19.57 billion of future lease payments under sale-and-leaseback agreements.
- Margins and unit metrics: Load factor rose to about 85% from 80%; ASMs increased 53.7% and booked passengers 65.9%. TRASM was 160.5 cents and CASM 130.9 cents, as presented in the filing’s operating-data table. Fuel expense increased 86.4% to Ps.12.38 billion.
Material changes versus prior comparable periods
Revenue and operating results rebounded sharply from the pandemic-affected 2020 period, when capacity, passengers and fares had fallen. Compared with 2019, 2021 ASMs were 14.7% higher. Average passenger revenue per booked passenger increased 20.4% from 2020, while average other passenger revenue per booked passenger rose 23.3%. The recovery also increased operating expenses, particularly fuel, landing and navigation, salaries, and maintenance.
Volaris changed the functional currency of its main operating subsidiary and the parent from the Mexican peso to the U.S. dollar as of December 31, 2021, applied prospectively. It discontinued related hedge relationships and reclassified a Ps.2.25 billion accumulated hedge reserve loss to earnings. Net foreign-exchange loss was Ps.2.59 billion in 2021, compared with a Ps.0.47 billion gain in 2020.
Outlook, commentary and risks
- Outlook and growth: The filing gives no specific numerical earnings or revenue guidance. Management describes continued growth through route additions, ancillary revenue, and fleet expansion. The company had firm commitments for 132 Airbus A320-family aircraft for delivery through 2029, subject to financing and execution risks.
- Fuel and inflation: Fuel is a major cost and represented about 34% of operating costs in 2021. Volaris had no fuel hedge positions at year-end. Management warned that Russia’s invasion of Ukraine could keep fuel prices elevated; a 5% increase in reference fuel prices was estimated to add about Ps.523 million to 2021 fuel expense.
- Regulatory constraint: Mexico’s aviation safety rating was downgraded by the FAA from Category 1 to Category 2 in May 2021. The downgrade prevents Volaris from adding new U.S. routes, services or aircraft to its U.S. operations specifications; it also affects the Frontier codeshare.
- Other material risks: COVID-19 and changing travel restrictions; peso/U.S. dollar movements; competition and fare sensitivity; reliance on airport slots and key suppliers; aircraft lease and purchase commitments; maintenance cost increases as the fleet ages; labor availability and negotiations; and operational, cyber-security and regulatory risks.
- Contingencies and unusual items: Possible legal contingencies were Ps.163 million at year-end, which management did not expect to have a material effect. The 2021 auditor issued an unqualified opinion on the financial statements and internal controls; the auditor identified the aircraft and engine lease-return obligation as a critical audit matter. No cash dividends are expected in the foreseeable future.
Important facts for investors to verify
- Confirm that the reported recovery in revenue and operating income is sustainable after accounting for fuel inflation, foreign-exchange volatility and the absence of fuel hedges.
- Review the functional-currency change and the Ps.2.25 billion hedge-reserve reclassification, including how they affect future reported results and comparability.
- Assess liquidity against current liabilities, lease payments, aircraft purchase commitments, and the company’s dependence on operating cash flow and financing.
- Track restoration of Mexico’s FAA Category 1 rating and any resulting impact on U.S. growth and the Frontier codeshare.
- Verify the 2022 capital-expenditure disclosure: the filing states expected capital expenditures of Ps.137.4 billion, while separately reporting Ps.137.45 billion of total aircraft and equipment purchase obligations; the relationship between these figures is not clear from the filing text.