Controladora Vuela Compania de Aviacion SAB de CV (VLRS) 2014 Q1 法說會逐字稿

Good morning, everyone. Thank you for standing by and welcome to Volaris first quarter 2014 financial results conference call. All lines are in a listen-only mode. Following the Company's prepared remarks, we will open the call for questions and answers. Instructions will be provided at that time. Please note this call is being recorded. I would now like to turn the call over to Mr. Andres Pilego, Volaris' Investor Relations Manager. Please go ahead, sir.

Thank you, Operator. Good day, everyone, and thanks for joining us today. On this call you will hear from Enrique Beltranena, Chief Executive Officer, Fernando Suarez, Chief Financial Officer. Also joining us, Holger Blankenstein, Chief Commercial Officer.

Before we begin, please let me remind everyone that some of the statements we will make on this call will constitute forward-looking statements within the meaning of applicable securities law. Forward-looking statements are subject to a number of factors that could cause the company's actual results to differ materially from anticipations. The risks are described in the Company's filings with the US Securities and Exchange Commission. Furthermore, Volaris undertakes no obligation to publicly update or revise any forward-looking statements. For opening remarks, I will hand over to our Chief Executive Officer, Enrique Beltranena.

Thank you, Andres, and good morning to everybody. Thanks for joining us. In the first quarter of 2014 market conditions were very difficult. Given the nature of our [visibility footprint] in relative markets, we have very pronounced seasonality in which our first quarter is historically our weakest quarter. In addition, remember that the Holy Week, one of the most active travel weeks in Mexico, happened in April of 2014 as opposed to March of 2013. So for comparisons you should take that into consideration.

While we are disappointed in the quarterly financial results, we have responded positively to the challenges. We have managed capacity and pricing in a very responsible way. We reaffirmed our cost control discipline and grew non-ticket revenues. The entire team remains very focused on accomplishing our medium and long term value growth and financial objectives by firmly executing our Volaris ultra-low cost model.

Sluggish Mexican economic growth resulted in a very competitive pricing environment. We have responded and will continue to do so by carefully managing capacity, carefully managing pricing and load factors while maintaining market share.

Violent crime in the north central region of Mexican households adversely impacted regions traffic in the short term. Consistent with our point-to-point core Visiting Friends and Relatives traffic and bus switching strategy, we will maintain our effort to manage the fare environment regardless of macroeconomic conditions and competitive pricing actions, without jeopardizing the healthy market demand, and in particular driven by travelers that already have and can continue to switch from buses to air travel.

The Volaris ultra-low cost model's strength was demonstrated in a very challenging quarter by substantial growth of non-ticket revenues, by maturing our ancillary product offering, and increased customer acceptance.

We continued to reduce unit costs further and maintain our leadership as the lowest unit cost operator in the Americas. Our leading Cost Per Available Seat Mile position positions us well in both the domestic market and cross border into the US.

We are pleased with Volaris' progress in areas where our strategy and execution continues to deliver as planned and promised. The Mexican Civil Aviation Authority, the DGAC, reported an overall passenger increase for the Mexican carriers of 12% for January and February 2014, reflecting on the high-end demand growth and progress in switching bus passengers to air travel. Demand in relation at this level reflects a disproportionate GDP multiplier which itself reveals how low the general pricing environment is.

Our Volaris ultra-low cost carrier model is an important differentiator of such strong demand generation. 26% of the total market passenger volume growth in January and February 2014 was attributed to Volaris. Market share is 23% in both domestic and international markets. We remain the second largest operator among Mexican carriers according to the Mexican Civil Aviation Authority.

But while we move the business forward and continued to build value, our economic and competitive factors affected our results. Let me start with the competitive front where I would like to highlight the following. We're mindful of the growing capacity in Tijuana and Guadalajara, specifically for one large carrier. We believe that our competitor's actions are creating a short term surplus of capacity in some of the markets we serve which we have and will be dealing with until supply and demand comes back into balance.

Volaris has many advantages which should help us in this environment. We operate by far in a more efficient way. We reaffirmed our lowest cost structure that enabled us consistently, and let me underline the word consistently, offering lower fares, maintaining coherence with our Volaris ultra-low cost carrier model. We are not changing the model. We are not moving away from what we stated we were going to be.

We're also taking several steps to insure our network long term success is sustained. Launching new capacity in low or non-operating point-to-point seating fares. First, we are relocating capacity to new destinations out of Tijuana -- (inaudible) Veracruz, Ciudad Juarez, Chihuahua and Cancun. These moves are strengthening our position in Tijuana and related sales of most destinations and offers customers the great (inaudible). Second, we are relocating underperforming capacity to new markets outside of Tijuana and Guadalajara where additional capacity can bring new sources of profitability into Volaris' network.

Volaris recently launched its fifth base in Monterrey with 8 new point-to-point routes focusing on our VFR customer base. With this base, we are complementing our network. This move strengthens our position in Monterrey as the airline that will serve more destinations and is consistent with our point-to-point, with our visiting friends and relatives strategy, and with our bus switching strategy. We will continue to build our Monterrey base in 2014 with more routes and more capacity.

We further developed and implemented bus switching offerings and initiatives designed to attract bus passengers which support our high asset utilization by increasing to 12.4 hours, block hours, per day during the first quarter. We are also accelerating capacity into international markets by growing our ASMs in 13% year over year in the first quarter and expect to expand further in the second quarter to 29% increase year over year as we have seen a better fare environment in international markets.

Notwithstanding all of this new capacity in ramp up, in the second quarter we also will be starting new service from Mexico City to four additional cities. We're very optimistic about these new services and believe it will allow us to tap into new revenues. In addition, we have managed to secure our slots in Mexico City airport from April to October with higher level of slots through the season.

We have given the pricing environment a very, very high importance. We cautiously plan to pick up capacity for the second quarter and we expect an increase in ASMs of only 2% to 3% compared to the fourth quarter in 2013. As a result of the previous actions, we see an improvement in fares. We see an improvement in unit revenues in the end of the first quarter and during April. Despite this difficult competitive environment, we are cautiously optimistic since we are seeing more rationality in the marketplace both in terms of capacity and in terms of fare plus some signs of economic improvement.

If we seasonally adjust for the first quarter 2014, pro forma TRASM and RASM will have improved for the quarter in about 3% to 4% respectively versus the reported numbers. Generally speaking, the unit revenues are under pressure in all markets. However, the schedule changes we have made in areas of the network, along with improvement in newer markets are and will be helping to offset some of the weakness.

Raising average fares in an environment like this has been really difficult. But the Volaris ultra-low-cost carrier model allows us to search for revenue enhancing opportunities in the level of the non-ticket revenues. After the launch of our new ancillary revenue platform in the fourth quarter of 2013, our non-ticket revenue strategy continued to develop during the first quarter of 2014. The new baggage policy and the retail on-board program has been rolled-out and the entire ancillary suite has expanded into something more important, it is gaining greater customer acceptance.

Non-ticket revenues excluding cargo per passenger have increased 10% year over year. The incremental non-ticket revenue strategy is driven by growth in a unique discount program which we grew in active memberships in 70% year over year to a level of almost 100,000 members.

Switching gears a bit on the labor cost front, salaries of Volaris unionized employees or ambassadors increased in line with inflation, but no further changes to existing fringes and benefits have preserved our competitive advantage and variable performance based compensation structure. Our salary and benefit costs as a percentage of core operating revenues are still 10 percentage points lower than our main competitor.

Let me ask Fernando to outline for you the key components of our results and to provide more detail on our efficiency improvement, the balance sheet strength, and ongoing fleet expansion and improvement. Fernando, please?

Thank you, Enrique. For the first quarter 2014, adjusted EBITDAR was Ps. 162 million resulting in an adjusted EBITDA margin of 6%. Net loss for the first quarter was Ps. 370 million, that is Ps 0.37 cents per share or US$0.28 per ADS. For the first quarter, our 12-month rolling lease adjusted pretax return on invested capital, or [RLOIC] was 12%. Volaris' total operating revenues were Ps 2.8 million which represented a decrease of 9.3% year over year as a result of lower average fares despite volume growth.

Volaris booked 2.2 million passengers in the first quarter 2014, a 10% growth rate year over year. Our first quarter non-ticket revenues and non-ticket revenues per passengers reached Ps. 514 million and Ps. 238 [sic - 208] respectively. Non-ticket revenue excluding cargo per passenger increased 10% in the first quarter year over year proving that our expanded ancillary services such as the new baggage policy and onboard service are moving in the right direction.

As a result of the macroeconomic and pricing environments, our cargo results have lagged our expectations. Nevertheless, cargo only represents less than 2% of our total operating revenues. In April we have started to operate US southbound (inaudible). As Enrique mentioned, the Volaris team did a very good job of continuing our cost discipline and strengthening our Lowest Cost Operator in the Americas competitive advantage.

CASM for the first quarter was Ps. 119 cents, a 2.6% reduction compared to the first quarter of 2013, primarily driven by efficiency benefits and sustained cost control discipline. CASM excluding fuel also decreased 2.3% year over year to Ps.72 cents. Reflecting our strategy to further reduce unit costs, Volaris has continued to take deliveries of larger sharklet-equipped A320 aircraft, bringing our seat mix of A320 and A319s to a 59% and 41% split, continuing our uniform and cost efficient jump fleet strategy.

On the fuel efficiency side, we ranked in the top 10 of most efficient airlines in fuel consumption among 134 airlines in the world. We ranked 9th in particular. This is according to an [IATA] report dated April of this year.

Our labor costs remain very competitive, as Enrique mentioned, and we further reduced marketing and direct sales distribution costs to 5.7% as a percentage of total operating revenues, mainly due to our reservation systems change. We have put strong emphasis on our efficient operations and culture of continuous improvement in this and other key areas of the business. On the fleet planning side, Volaris' fleet was comprised of 46 aircraft at the end of the quarter. That is 27 A320s and 19 A319s, with an average age of 4.0 years. During the first quarter we received three new sharklet-equipped A320s that will be incorporated in the second quarter and we replaced two vintage A319s.

We maintain a strong balance sheet and solid financial position as we have Ps. 2.2 billion [sic - million] in unrestricted cash or US$171 million. The Company recorded negative net debt, or a positive net cash position, of Ps.1.6 billion [sic - million] and total equity was Ps. 3.6 billion [sic - million].

During the quarter we expanded our available lines of credit and borrowing facilities by Ps. 410 million or US$31 million. We now have committed financing for all of our pre-delivery payment obligations for aircraft delivering up to the second quarter of 2016. During the first quarter, Volaris incurred capital expenditures of Ps 228 million, which included pre-delivery payments for future deliveries of aircraft net of refunds of Ps. 83 million and acquisitions of rotable spare parts, furniture and equipment of Ps. 145 million.

On the risk management side, we continue with our program to hedge short term fuel costs. As of March 31st, we have hedged via jet fuel strops 15% and 9% of our second quarter and third quarter 2014 expected fuel consumption respectively.

On the capacity front, in the second quarter we expect to manage capacity by growing ASMs between 17% and 19% year over year and we foresee our full year 2014 ASM capacity between 11% and 13% increase year over year as we carefully monitor for signs of stronger Mexican economic activity in the second half of the year. Now I'll turn the call back to Enrique for concluding remarks and our questions and answers session.

Thank you, Fernando. So let me summarize, the first quarter was a challenging quarter for us that it highlighted the ways of our Volaris ultra-low-cost carrier model has been developed precisely with the unique characteristics of our marketing mind. It presents a long term opportunity that's difficult to match in the Mexican air transport industry. We certainly wish we were reporting better results for the quarter. However, our excellent operational execution, responsible capacity management, a (inaudible) focused on cost control, steady growth in ancillary services, and quick response to the marketplace changes reflects the Volaris team's ability to manage our business in a very difficult time. So Operator, please open the call to questions.

Thank you, Sir. We will now begin the question and answer session. (Operator Instructions). Duane Pfennigwerth, Evercore.

Hi, guys. Wondered if you could quantify how much of a headwind the remaining revenue recognition change was on the first quarter for ancillaries. And along those lines, I wonder if you'd be willing to give us kind of the ancillary run rate by month.

Hello, Duane. We think that the revenue recognition effect materially affected the fourth quarter. It was most of it recognized in the first quarter as we have a relatively short booking curve. In terms of ancillaries per passenger, excluding cargo, we did see a 10% increase in the quarter and we have seen an upward trend if we break down the quarter month by month from January to March which gives us a cautious optimism that there is a good, positive trend on the rollout of the ancillaries.

Okay. Just with respect to the unit revenue improvement that you cited in April and into the second quarter, I wonder if you can just sort of comment on relative to what -- I assume you're not suggesting unit revenue improvement year to year, but rather versus the January/February. So I wonder if you could just expand on those comments.

Yeah, sure, Duane. This is Holger. We have been seeing an upward trend in travel in February, March and in April, and we would expect to see a low double digit travel improvement in the second quarter versus the first quarter which is driven mainly by the Holy Week effect in April, very active capacity management in the quarter, and different network enhancements that Enrique already mentioned. Though, this would still be lower than last year. We also continue to drive ancillary revenues, as we already mentioned, and non-ticket revenues per passenger, excluding cargo, would also grow at double digit rates year over year in the second quarter and beyond.

Great. That's helpful. Thank you.

Michael Linenberg, Deutsche Bank.

Good morning, everyone. Just a question on the new routes that you launched in the quarter, the new Monterrey base, how that's performing. Presumably there's a ramp up there, so maybe the profitability is lagging the overall system. Any color on that would be great. Thanks.

Sure, Michael. The objective of our Monterrey expansion is diversification of network revenues and profits. But always within our core ultra-low cost strategy. We launched most of these new routes at the very end of March, so they barely entered the quarter and they're currently in ramp up as you mentioned. And they are very much in line with expectations. It is important to mention that these are point-to-point markets with via as our focus and do not tax very much the Mexico City/Monterrey business traffic routes. And competitive reaction has been very much according to our plan.

Okay, great. And just if I can squeeze in a few more, on the Mexico City service, the additions April through October, are those just seasonal slots, number one A. And one B would be, where are you getting those slots from?

Michael, the process of obtaining slots in Mexico has been developing. So we had the first shift, let's call it like that, was from October, end of October of last year until I would say mid-March. Then in mid-March we were assigned what they called the summer season slot assignment, okay? And what we are trying to do is both things. First, it is higher because our summer of last year was higher. So our base slot assignment basis was higher, so as a result of that we're getting more slots during the summer. And the second thing is, we managed to get a higher level of slots than what we had during the winter.

So basically it is a permanent capacity that will be added, A. And second, it's going to be some substitution of what we are calling the nonperforming routes, which is pretty much what we are doing all across the network.

Okay, great. And then just lastly, if we can just go back to the competition, I mean obviously it sounds like that airlines in Mexico are being very, they're competing on price very intensely. But is there -- are there other things that the competition is doing to steer traffic or to move share? Are they providing incentives to the travel agency community? Are they maybe through their frequent flier programs incentivizing customers to shift over? I mean are they utilizing tools that maybe Volaris does not employ? I mean is it just price or are there just other initiatives where maybe behind the scenes they're doing email campaigns to their customers? What else are you seeing on the competitive front? And maybe how does, how can Volaris respond since I know you do have a young or an immature frequent flyer, or I should say sort of loyalty/credit card program. Are there opportunities in that area to fend off the competition?

Well, Michael, definitely the price environment has been very tough and mostly what we see is price competition. In some of our markets in Tijuana and Guadalajara definitely the competition is employing a whole host of tools, incentivized travel agents and the legacy channels. But Volaris is very, very clear on its ultra-low cost model. So anything we respond to is going to be in a very ultra-low cost way. Using direct distribution channels, using direct marketing campaigns, things that do not increase our sales, marketing and distribution costs. That's very important for us.

I think on the second part of your question, I mean if we are using some different things, yes, I would say A, first the credit card has matured to a level of almost 90,000 credit cards deployed into the market. And what we are seeing on the credit card is a very high level of consumption from the customers.

The second part is, we did two things during this quarter, Michael. The first part is we expanded our VClub, which is the discounted fare club membership, in a very aggressive way. To a level that we have now almost 100,000 members of that club that are actively purchasing and where we are directing our promotions and our marketing efforts.

And then finally, in the quarter, almost at the end of the quarter, we opened something which you can watch now in our webpage which is what we call the promotional case of where we discount fares in very, very clear, directed fares. And it's part now of the bottom part of the webpage. And so it's called the options section or (inaudible) in Spanish. And it is a very active reduction pricing, especially on inventories that we cannot, that we see we will not be realizing in the short term.

Okay, very good. Thank you, Enrique and Holger.

Victor Mizusaki, UBS.

Hi, good morning. Just a quick question. With the new revenue management system, I mean when we take a look on your yields in the first quarter, it's declining 21% year over year. So I'd like to know if you can quantify how cheap on average your base fare is versus your main competitors.

Let me just highlight our system changes. We did a change in the reservation systems in the fourth quarter of 2013 which impacted only our main distribution channels, our reservation system and obviously our website. We have not changed our revenue management system. We very much employ the same revenue management system that we have been using. And within that we have reacted to competitive pressures on fares and have reduced our fare to be very competitive versus all the participants in the market. We typically have fares in 80% to 85% of our flights that are lower than our competitors.

Okay, thank you.

Helane Becker, Cowen.

Thanks very much, Operator. Hi, guys. Thanks for the time. Just two questions. One, of the Mexican airports that have reported so far, they are basically saying that such a small percentage of the travelers have shifted from buses to air. And I was just kind of wondering, what's your expectation given where the Mexican economy is for the amount of people you can shift to air this year?

Helane, let me expand a little bit on our bus switching strategy. According to recent surveys, 6% of our interviewed passengers stated that they are first time fliers. So that demand from first time fliers has increased significantly since 2013 and in the first quarter of 2014. Also, about 15% of our fliers state that they used Volaris as their first airline they ever flew. And also 20% of our customers state that they now consider Volaris to be a valid alternative versus the buses that they previously used.

According to recent data of the bus market that was just released by the Secretary of Transportation here in Mexico, the bus market did not grow at all last year, versus the air market that grew almost 10% which is obviously driven by Volaris' ultra-low cost model. For 2014 we have and continue to focus on converting those bus passengers with very targeted sales, marketing and (inaudible) initiatives. So we are very, very happy and confident we will continue to be able to switch bus passengers to Volaris airplanes.

Great. And then my other question is, have you thought about M&A or consolidation in the Mexican industry to reduce competition, I guess, for saying it for lack of a better way?

Helane, I think that's much more a question for our board of directors. I'm not allowed to even answer that.

Okay, fair enough. Thank you.

The next question we have comes from Ricardo Alvez of Morgan Stanley.

Hi, guys, it's Eduardo here actually. A couple of questions. First one, on the debt side, I think you guys raised some debt in the first quarter. First, is it true? And do you expect to raise more debt throughout the year to avoid any cash, any reduction on the cash position?

Eduardo, this is Fernando. During the quarter we utilized our existing PDP facility that we have to finance the aircraft. That's the only activity that we've seen on the debt side which was basically around Ps. 99 million or US$8 million equivalent. It's basically the utilization of the existing revolving facility. But in addition to that, we have been active in obtaining further lines of credit as our credit profile post-IPO has improved materially. We have raised in the first quarter, or managed to secure, committed debt facilities for an additional Ps. 31 million which is a combination of both PDPs, more PDPs that can cover more aircraft, and also short term line of credit for utilization as letters of credit in our fleet lease obligations. Instead of posting cash which is inefficient for the company, we simply put letters of credit.

Okay, it's clear, Fernando. And second question, on the yields and load factor, could you give us a color how April was? And also how is the fall booking, both in terms of load factor and also yield?

Let me -- it's a little too early to tell you more about the second quarter, but what I can tell you is that in April we saw a recovery of the fares somewhat at the expense of loads. We still need to observe May and June, but we do see an increasing travel trend versus the first quarter due to a better fare environment, network adjustments, and most importantly, growing ancillary revenues. Although this will still be below last year.

Okay, it's clear. And just a final question on competition. You have some carriers or some airlines in Mexico that are leased and were able to access the capital market in a much better cash position. But some of them were not able to raise money or access the capital market. Do you -- have you seen the guys that are not listed pulling back a little bit in terms of adding capacity or at least reducing the speed of growth as we had a much tougher environment on fares than probably as you guys did in the first quarter. I believe the other airlines are also burning some cash, so have you seen lower competition on the back of that?

Well the competitive reaction on capacity is very much in line with our expectations in the Monterrey market. We have seen some declines in capacity (inaudible) year over year in the first quarter 2014. And going forward we see the fleet swap from the 737s to the A320s which is ongoing. And then on the other competitors, we see some increase in Interjet capacity on the super-jet which are being positioned in some of the regional markets that are in competition with AeroMexico Connect. And then on the AeroMexico side, the growth trends are very much in line with what was stated by that competitor.

And in terms of Volaris, the capacity additions in the domestic market, they have been more this new Monterrey routes and international land like Mexico US? Or how are you adding capacity? What sort of routes are you adding capacity now?

Okay, in general I can tell you that our capacity expansion in the domestic market has been more reserved. We have been a little bit more conservative in the Tijuana, Guadalajara and in the domestic in general. As Enrique mentioned, we're shifting some of the growth to the US market which has seen a much more stable fare environment. That is a trend that we foresee to continue for the remainder of this year.

Did the anticipation that you did in Monterrey, because I think initially the idea was to launch routes to Monterrey more in 2015 or after that, I think you anticipate that. Was it because of the new capacity that was deployed on Tijuana and Guadalajara and the other routes that you operate and that was more or less what happened?

Some of the Monterrey expansion was planned for this year. But we did a much more heavier expansion because we had some capacity that wasn't profitable in the rest of the network that we decided to shut down and relocate both to Monterrey and to the US.

Okay, thanks.

Duane Pfennigwerth, Evercore.

Hi, thanks for taking the follow ups. I wonder if you could comment on how long it typically takes a market to reach maturity. And how much of your capacity would you consider to be in development as of the June quarter?

Duane, it depends. If it's around already open cities or already cities where we are operating, the ramp up is somewhere between 4 to 6 months in the domestic market. If it's new capacity in the domestic market, it takes somewhere between 6 to 8, 9 months, okay? In the international market, it takes us somewhere about a year to mature the market. But what we've been doing now, I mean adding capacity over our already open cities, so we have not done any openings so far in this year. So its maturity ramp up is expected to be somewhere around 9 months.

Okay, and any estimate for the June quarter of what percentage? Is it 25%, 30% that you would consider new in development, or?

The new in development percentage is between 3% to 4% in the second quarter.

Okay, that's helpful. Then just one last one for Fernando. We saw with another ultra-low cost carrier in the US, over time they were able to get so much more favorable lease rates. Part of that was on extensions of A319 renewals where I think the rates were like 20% to 30% lower per aircraft. So I wonder for you, how you think about that opportunity longer term and how quickly you could see an impact or is it just that you're going to be taking more valuable aircraft so it's -- can you just help us think about that opportunity longer term? Thank you.

Yes, Duane, we have seen very attractive lease extension proposals from existing lessors. We're clearly not taking any on the A320s, but we're considering maybe a 320 or two in the next 12 to 18 months with very deep rental discounts that are being offered. So we are evaluating that. And we're in the middle of an RFP of our delivery end of 2014 and 2015, 2016 of aircraft. This would still be CLs, the A330 CLs. We're seeing aggressive lease rate factors at this stage, but we're also getting -- we're probably getting the more, or the better benefit is on credit terms is on maintenance reduction reserves. For certain maintenance components we no longer need to post maintenance reserves and we're now getting the possibility to be able to post letter of credit from the remaining maintenance reserves as opposed to cash when we originally had to put most of it in cash in the recent years. That's on the CLs. We're not in the marketplace with the neo, so we wouldn't have an opinion yet on lease rate factors or leasing terms on the neos yet.

Okay, thanks very much.

So thank you very much to everybody. I just want you guys to really stick with one last message, okay? And I mean we certainly continue very, very (inaudible) to create long term value. But it is very important for you guys to understand we are actively managing capacity. We are actively managing the pricing environment. We have been very careful reallocating capacity to new places or to new routes. And we have been tremendously focused in developing our ancillary revenues with, at the same time, a very, very aggressive focus on reducing cost. So we think while we continue building our ultra-low cost model in a very active way and in a very professional way, we are very conscious and clear that we need to manage capacity so the fare environment improves. And I want you guys to stay with that message at the end of this phone call. And thank you very much to everybody for participating.

And we thank you, Sir, for your time, and to the rest of the management team. The conference call is now concluded, Again we thank you all for attending today's presentation. At this time you may disconnect your lines. Thank you and have a great day, everyone.