Controladora Vuela Compañía de Aviación SAB de CV Q1 FY2024 earnings call

• Volaris delivered strong first quarter results despite challenges with engine accelerated inspections. The team executed well on plans to enhance customer service, manage schedule changes, and control costs.
• Undertook preventive accelerating inspections on engines, resulting in grounding of ~60 engines, with pre-arranged compensation from Pratt & Whitney. Continues to work with Pratt on engine work.
• Total operating revenue grew 5%, unit revenue rose 21%. ASMs contracted 13% better than prior guidance. EBIT and EBITDAR margins expanded.
• Received two new A321neos ahead of schedule, enabling capture of demand during Holy Week and Easter. Implemented new base schedule, reallocated capacity from domestic to U.S.-Mexico routes.
• Robust demand in domestic market, especially in March. International load factor 82%, domestic 91%, overall 87%. Net promoter score 32%.
• Agreed 2024 Union Agreement to maintain labor relations and cost advantage. Refining mobile app and digital assets to drive direct sales and customer satisfaction.

Total operating revenue grew 5% in the first quarter of 2024. Unit revenue rose 21%. ASMs contracted 13% due to engine accelerated inspections. EBIT was $104 million (vs. $31 million loss in Q1 2023) with a 14% margin. EBITDA was $235 million with a 31% margin. Net income was $33 million. Ancillary revenues represented 51% of total operating revenues, with total ancillaries per passenger at a historically high $57.

• Second quarter 2024: Expect ASM reduction of ~18% year-over-year, TRASM of $9.1 to $9.2, CASM-ex fuel range of $5.5 to $5.6, EBITDA margin between 31% and 33%.
• Full year 2024: Expect ASM reduction of 16% to 18% year-over-year, EBITDA margin in range of 32% to 34% (up from initial 31% to 33% due to strong first quarter), CapEx net of finance fleet delivery payments of $400 million.
• Assumes average exchange rate of 17.30 to 17.50 Mexican peso per US dollar and average U.S. Gulf Coast jet fuel price of $2.60 to $2.70 per gallon.

• Uncertainty regarding engine turnaround times and progress in MRO capacity and spare parts from Pratt & Whitney.
• Macro-economic and geopolitical uncertainties.
• Rumors of possible FAA Category 1 downgrade, though management clarified no concern at the time.
• Concerns about upcoming political campaign in Mexico and its potential impact on aviation policies, particularly regarding metropolitan area airports.

Q: On GTF, have you gotten any engines back yet? How did those turn times compare with expectations? Are you seeing parts being prioritized for grounded aircraft versus new deliveries? Can you just elaborate on spare engine availability? Was this availability that came up as a function of your negotiations and hence the higher CapEx?

A: Jaime Esteban Pous Fernandez responded that they continue seeing progress, but haven't received powder metal engines back. Turnaround time was about 310 days. Skeptical on inductions and speed of processing engines. Spare engine availability not seen at promised levels, and higher CapEx related to engine issues.

Q: How should we be thinking about the Easter shift impact?

A: Holger Blankenstein said the Easter shift helped the first quarter, with one week of Easter high season in March quarter and one in June quarter, expecting good results in April and June quarter with TRASM guidance of $9.2 for June quarter.

Q: How very strong you guys have been on the unit revenue side. Is it fair to say that some of those competitors are more focused on beach destinations and you're not? And you guys are generating a lot more revenue outside of basic economy versus some of your competitors?

A: Holger Blankenstein stated factors like capacity decrease in domestic market due to Pratt & Whitney roundings, Aeromexico issues, network trimming to least profitable markets, rational market conditions, shift to international markets, and Easter peak contributed to strong unit revenue.

Q: Can we conceivably see some upside on ancillary revenue number assuming FX neutrality?

A: Holger Blankenstein said there is upside due to shift to international markets, new products, better pricing, personalization, and recurring revenue streams.

Q: What are the number of aircraft that are now grounded due to the GTF issue? Where does that number peak out for the year?

A: Jaime Esteban Pous Fernandez said average number of grounded aircraft in first quarter was 29, peak expected in third quarter and beginning of fourth quarter.

Q: What's the net impact of the engine recall? Is this positive or negative to EBITDA and margins?

A: Jaime Esteban Pous Fernandez said this quarter was about TRASM, with Pratt compensation not covering revenue loss. The plant situation is negative for the business overall, and they remain skeptical about upcoming engine issues in the next couple of quarters.

Q: On the FAA category one downgrade rumor and oil volatility strategy.

A: Jaime Esteban Pous Fernandez clarified no indication of a new FAA category one downgrade for Mexico. No hedging for fuel or FX, with natural hedges and 90% of cash invested in dollars.