Grupo Aeromexico SAB de CV (AERO) 2019 Q1 法說會逐字稿

Good morning, and welcome to the Grupo Aeromexico First Quarter 2019 Earnings Results Conference Call.

Before proceeding, I'd like to mention that certain comments made during the conference call may constitute forward-looking statements regarding future events or the future financial performance of the company. These statements are based on the current beliefs and expectations of management and the company.

Forward-looking statements are based on management's current assumptions and on the information currently available and do not guarantee the company's performance. The timing of certain events and actual results may differ materially from those projected by forward-looking statements due to a number of factors, including, but not limited to, those inherent to our industry as well as commercial, economic and other risks and uncertainties. (Operator Instructions) This conference is being recorded.

I'd now like to turn the conference over to Mr. Jonathan Wallden, Senior Vice President of Financial Planning and Investor Relations. Please go ahead.

Good morning, and thanks for joining us for our first quarter 2019 results presentation. Speaking on the call today are Aeromexico's CEO, Andrés Conesa; and CFO, Ricardo Sánchez Baker. As per usual, Andrés will open the call providing insights into our quarterly performance and results, and Ricardo will then address our revenue, cost and cash flow performance. There will be an opportunity for questions at the end of the call.

So now I'd like to turn the call over to our CEO, Andrés.

Thank you, Jonathan, and good morning, ladies and gentlemen. Thanks for joining us today. The first quarter of 2019 was challenging for the Mexican aviation industry due to higher fuel prices, a depreciating Mexican peso and a softening economic outlook. The year-on-year fuel prices in peso terms increased by 6.1%. The peso depreciated by 2.7% and inflation reached an annual rate of 4%. Market expectations have pointed to a softening outlook for GDP growth in 2019 with analyst forecast falling from 2% in January of this year to 1.5% in March. In addition, on March 11, we temporarily grounded our 6 Boeing 737 MAX 8 aircraft in line with the worldwide grounding of the fleet. We immediately prioritized the recommendation of our previously booked passengers on alternative services and aircraft. To cover the withdrawal of the 6 aircraft, we arranged for those 2 737-700s that were grounded in January of this year and also optimized utilization of the rest of the fleet, which we have been able to do as this is the off-peak season. Having successfully stabilized operation, we're working with our partner Delta, reoptimizing our transborder capacity and network during the second quarter of the year. We are reviewing opportunities for Delta to take some of Aeromexico's transborder capacity in order to free up capacity, which we would redeploy elsewhere on our network. The temporary grounding of the MAX led to an estimated revenue loss of approximately MXN 200 million during March, as we have been again reaccommodating passengers on alternative services. We are currently not considering the MAX in our operating plans for this month, April, and for May. Our internal planning assumptions are that the planes will start service again during the first week of June.

We are due to receive a further 7 MAX aircraft this year, 4 MAX 8 and 3 MAX 9s, this year before the end of 2019. And with these additional 7, the total number of MAX aircraft in the fleet by December of this year is expected to reach 13. In this challenging environment, Aeromexico delivered an operating loss of MXN 377 million in this first quarter, representing a negative 2.3% operating margin. Capacity during the first quarter decreased by 3% compared to 2018, which included a planned capacity reduction following the cancellation of our services to Boston, Washington and Portland, plus the impact of this temporary grounding of the MAXs. This capacity reduction supported RASK improvement. Revenue per ASK in pesos increased by 3.6% during the quarter, driven primarily by improved load factors of 2.1 percentage points. This result represents our fifth consecutive quarter of RASK expansion.

Our average ancillary revenues per passenger also improved during the first quarter from MXN 231 to MXN 237 per passenger between the first quarter of 2018 and the first quarter of 2019. This represents a 3.0% year-on-year increase. Our continued focus on customer satisfaction is also delivering enhanced results with another quarter of year-on-year NPS improvement.

From an operational perspective, we continue our drive focusing on what our customers truly value. This is operational excellence.

I am proud to announce that during the first quarter of this year, we have delivered 55 days with a 100% completion factor. That is a 100% of the planned flights operating on that -- on the day. The airline, we continue to focus on investing where our customers get real value with strategic CapEx allocation to enhance our customer experience, focusing on 3 key pillars: reliability, airport experience and onboard experience. For example, as a result of extensive research, we are now rolling out free messaging onboard our 737 fleet. During 2019, we are focusing on enhancing our customer relationship management, aligning our systems and processes to ensure a single view of the customer.

With regard to airport infrastructure in Mexico City, we are working closely with the government on potential investment required in order to optimize the passenger experience and economic value of the airline industry to Mexico. These discussions are constructive and are progressing well.

During the last 12 months, we carried almost 22 million passengers, reflecting the depth and breadth of our network and the value that we're able to bring to the Mexican economy. As we announced in our last call, we will be starting direct flights from Mexico City to Barcelona, Guayaquil and Cali, this summer, broadening our network proposition for all of our frequent travelers. For the rest of the year, we will continue to manage our capacity with strict discipline. We maintain our guidance of flat growth in ASKs for 2019.

So to wrap up on the first quarter of this year, I would like to take this opportunity to thank all of my colleagues at Aeromexico for their commitment in achieving these set of results in what has been another challenging quarter. This concludes my remarks. And I would now like to hand it over to Ricardo who will provide more detail on the financial results of this quarter. Thank you for your confidence, and Ricardo, please go ahead.

Thank you, Andrés. Good morning, everyone, and thank you for joining us today. As Andrés mentioned, this has been a challenging quarter in the Mexican aviation industry due to high fuel prices, a depreciating peso and a softening economic outlook of the Mexican economy and overcapacity in the market.

For the first quarter, Aeromexico delivered an operating loss of MXN 377 million, representing a negative 2.3% operating margin. Our EBITDAR reached MXN 2.8 billion with an EBITDAR margin of 17.2%.

On January 1 of this year, Aeromexico adopted IFRS 16. IFRS 16 provides a new accounting methodology for leases. The lessee recognizes the right of usage of an underlying asset, generating a liability for the outstanding lease obligation against which lease payments are made. The asset is depreciated using the straight-line method while the lease liability is initially measured at the present value of the remaining lease payments.

On the cost side, fuel price increases, depreciating peso and relatively high Mexican inflation created some headwinds. With regard to fuel, first quarter fuel expenses amounted to MXN 4.8 billion, a 2.8% year-on-year increase, driven by a 6.1% increase in peso market fuel prices. The price impact alone generated a MXN 275 million cost pressure for the quarter. With respect to exchange, the Mexican peso depreciated on average 2.7% against the U.S. dollar compared to the same period of 2018. This had a negative impact on several operating costs, including depreciation, maintenance, reservations, communications and traffic, which, excluding fuel, totaled approximately MXN 174 million for the quarter. As a result of these factors, our cost per ASK in pesos increased 6.4% during the first quarter while our cost per ASK, excluding fuel, in pesos increased by 6.5%. Through the quarter, our CASK has been reducing as we have observed the fixed cost associated with the capacity adjustment plan we announced during the fourth quarter of 2018, including the sale of our 3 Embraer 170s and the grounding of 2 737-700s, with most of the capacity adjustment taking place in mid-January, at the end of the holiday season.

We registered MXN 141 million of exchange-related losses as the functional currency adjustment exceeded the impact of exchange rate-related operating adjustments.

During the quarter, the company reported a net loss of MXN 1.3 billion.

Turning to our cash position. Our cash flow generation remained strong. We generated MXN 2.3 billion of net cash coming from operating activities during the first quarter of 2019. Net cash flow used in investment activities amounted to MXN 452 million and an additional MXN 3 billion were used in financing activities. In particular, we amortized MXN 1.3 billion of financial debt. With this, our cash balances at the end of the quarter amounted to MXN 8.7 billion, representing a cash to last 12-month revenue ratio of 12.4%.

At the end of the first quarter, our leverage, measured as adjusted net debt to EBITDAR, stood at 4.6x. This ratio now computed under the new IFRS 16, reflects more precisely the actual leverage of the company as compared with the previous industry standard measurement using a capitalized lease calculation.

ASKs decreased by 3% compared to the first quarter of 2018, with international capacity decreasing at 3.5% and domestic capacity at 1.6%, this resulting from our planned capacity adjustment reduction, plus the impact of the temporary grounding of the 737 MAX aircraft.

From a fuel perspective, during the first quarter, we took delivery of our 6 737 MAX 8 aircraft. And during 2019, we expect to receive 7 more MAXs, including 3 MAX 9s and 4 MAX 8s, as Andrés already mentioned. We plan to conclude the year with 3 fewer aircraft, but we estimate our ASKs will remain at the similar level as those recorded in 2018. This will be achieved through our operating strategies.

This concludes my remarks. Thank you, once again, for joining us on today's call. Andrés and I would now like to answer any questions that you may have. Thanks.

(Operator Instructions) Our first question is from Michael Linenberg from Deutsche Bank.

Two quick ones here. So you're still guiding to flat capacity and yet you've pulled down 6 MAXs. I know that 2 of the 737-700s have been reinstated into the fleet. But then as we think about the deliveries of the remaining 7 MAXs, the 8s and 9s for the rest of the year, it seems like that everything is getting pushed back and there will potentially be delays. So flat capacity is probably a best case assumption, maybe even a somewhat of aggressive assumption. I mean, I think when we get to year-end, is it more likely that we're going to see capacity actually down slightly? Like how should we think about that given all the moving pieces?

Yes. As we mentioned, we need the MAXs back, obviously, to get this planned capacity growth given that our ASKs decreased 3%. As I mentioned, we are not flying -- we were not contemplating flying the MAXs in April and in May. But if they come back in June, we have 1 MAX delivery this month and the next ones are in June. So we feel that we're fine. Also considering the fact that we will also remain -- keep flying the 2 737-700s, and that we can add some additional plane by tweaking a little bit block times and being a little bit more aggressive on that front. Obviously, keeping our DC row and AC row now according to the targets that we have. So we believe that if we can fly the MAXs again starting June, we are okay with that. If that doesn't happen, yes, it's going to be a negative ASK growth for the year.

Okay, great. And then just my second question. I want to go back to the fact that you did pull down some transborder capacity. I mean, you highlighted getting out of the Mexico City to Boston and Dallas and Portland markets, and those were recent adds. And I'm just curious, when I saw that, I was actually somewhat surprised thinking that here is the flag carrier of Mexico, and the fact that you have this strong relationship with Delta, why a market like Mexico to Washington, D.C., 2 capitals of 2 very strong trading partners, why that couldn't work? And then maybe, it was weakness in GDP, was it a macro issue, was it the fact that maybe it was a market that was going to be better served over Atlanta with Delta and to use that airplane and put it into a market like Cali, for example, which you're going to start later this year? I mean, just -- it seemed out that you were pulling out of what should -- it should have worked, right? That should be a market that should work. And I didn't know if it was macro or opportunity cost or just maybe the strength of the relationship with Delta that maybe it was just better to route passengers over one of the Delta hubs. Can you talk about some of those route deletions and maybe why they didn't work?

Yes. It's -- I think it's a combination of all the factors that you mentioned. You cannot single point one of them. An additional factor is that the account of the U.S. government that changes hands every year or every 2 years, Delta used to have it. Now -- no longer it has it. So flying from Washington, which is a big hub for the U.S. government workers, not now, I guess I think United has an account. So that also played a role. And what we have been doing is really connecting Delta hubs with Aeromexico hubs, and Washington is not a hub of Delta. As Delta grows in Boston, the likelihood of going back to Boston will increase. We are even thinking in the case of Portland of returning soon again. But in the meantime, its opportunity cost, you will see routes that are performing better and that's why we switch off. If you ask me how is the transborder market doing today versus last year, I think its better. Last year it was very tough. There was lots of order capacity. It has been cleaning. So we are doing better.

We've added some additional flying north, for example, to Detroit from some cities in Mexico, which is a Delta hub. So it's a give-or-take. So we monitor this by the way, and hopefully, we can return and get back to servicing these 3 cities soon.

Our next question is from Mauricio Martinez from GBM.

My question is on the ancillary front. We are seeing now a lowdown in growth in that bracket, maybe because branded fares are now completing the year after rolling out. But I'm wondering, how much we should expect on that front for the year? If we can -- if you can share with us, what is next after branded fares? Or what should be the main driver of Grupo there?

Yes, we continue to see additional opportunities to strengthen ancillaries. Even as you've clearly mentioned, the fact that you have branded fares, obviously, it has an impact because the money flows through the fare rather through ancillaries. And the fact that we are deploying branded fares across all the network, we have an impact also on the ancillaries that you can collect. But we believe that we have additional opportunities to do it so -- and to grow. So probably, you will expect positive things in the remainder of the year on this front.

Great. And my second question would be on the transborder market. You just said that there is a much healthier market now versus a year ago. But this quarter, we saw yields, international yields weaker than in the previous quarter. So what are your thoughts there? And well, is there any capacity increases from your competitors? Or what are you seeing now?

Yes. I mean it has improved the transborder market. It's not where it was a few years ago. Yields have recovered a little bit. But again, in my view, still not in line with the current environment of a weak economy, higher oil prices and the depreciation of the peso. And that I think has to do with some overcapacity in certain markets. It has been -- the market has been cleaning, if you can call it. We are seeing some reduction in capacity, particularly from Mexico City to some cities in the U.S. But again, we feel, as you've mentioned, we are aligned with that, but it still is not enough. So probably you will expect it's -- not a declining capacity, but a much more moderate growth, probably of single digit of the industry versus the double digit that you saw in terms of ASK growth in the transborder market, both in 2017 and in 2018 after Open Skies.

(Operator Instructions) If there are no further questions, I'd like to turn the floor back to Mr. Conesa for any closing comments.

Well, thank you for listening to the call. We look forward for the second Q, and again, the outlook for the remainder of the year. We think that it's better than what we saw in the first quarter. So probably we will see some positive surprises going forward. So thank you very much, and talk to you soon. Bye.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you again for your participation.