Controladora Vuela Compania de Aviacion SAB de CV (VLRS) 2022 Q4 法說會逐字稿

Good morning, everyone. Thank you for standing by. Welcome to Volaris' Fourth Quarter and Full-Year 2022 Financial Results Conference Call. (Operator Instructions)

At this point, I would like to turn the call over to Ricardo Martinez, Investor Relations Director. Please go ahead, Ricardo.

Financial Officer, Jaime Pous. They will be discussing the company's fourth quarter and full-year 2022 results. Afterwards, we will move on to your questions. Again, please note that this call is for investors and analysts only.

Before we begin, please remind that this call may include forward-looking statements within the meaning of applicable securities laws. Forward-looking statements are subject to several factors that could cause the company's results to differ materially from expectations, as described in the company's filings with the United States' SEC and Mexico's CNBV. These statements speak only as of the date they are made, and Volaris undertakes no obligation to update or modify any forward-looking statement. As in our earnings press release, our numbers are in U.S. dollars compared to the fourth quarter of 2021, unless otherwise noted.

And with that, I will turn the call over to Enrique.

Thank you, Ricardo, and everyone, for joining us today. We are pleased to be speaking again after seeing many of you in New York for our Investor Day in early December. In the few months since then, you have undoubtedly heard from our peers about global airlines prevalent challenges as they look across 2023 and beyond. We are not in the same position. As we recap our full-year 2022 and turn to our expectations for this year, Volaris has taken the necessary measures to ensure stability and profitable growth. We prepared for our growth by hiring and training almost 1,500 pilots and over 2,800 flight attendants among others in 2022 alone.

Our net debt will remain stable in 2023. Our leverage is well below industry levels and will drop sequentially in the upcoming quarters. We have a strong balance sheet and cash generation capabilities with a conservative debt position and healthy financing conditions. Our new fleet financing is signed until 2025 and cover sales and leasebacks and CapEx associated with predelivery payments. 91% of our total debt is related to long-term growth through lease liabilities with no exposure to rising interest rates.

In addition, in April, we will enter a new era for Volaris, receiving the first new delivery from the largest ever Airbus order placed by us along with Indigo's portfolio airlines, allowing us to reduce our CASM ex fuel going forward through improved fleet ownership costs. Our fleet plan aims to drive further efficiencies, low costs going lower. Bottom line, we remain committed to delivering sustainable and profitable growth in a disciplined manner. The combination of a differentiated revenue management strategy and strict control of costs enabled our operating earnings to offset around $550 million of full-year fuel price impact, resulting in a margin of 5.9% in the second half of the year.

And throughout 2023, as you will see in our guidance, we expect significant EBITDAR expansion. Speaking of a differentiated revenue management strategy, we moderated fares in specific price-sensitive domestic market to deliver strong load factors and raise base fares in the international markets, including Central America to offset the higher fuel cost in our [longer] sector. During the last quarter, ancillary revenues per passenger posted a 6% increase compared to the same period in 2021.

For the full year 2022, ASMs grew 26%, in line with our guidance, comprising 22% growth in the domestic market and despite Mexico's FAA category status limitations, a remarkable 34% growth in our international markets. We were able to grow in the transborder market between Mexico and the U.S., plus our Central American operation structures played an essential role in this international growth offsetting the CAT 2 limitations and diversifying our growth expansion without relying on any particular region.

As we said at our Investor Day, such growth was driven by a unique opportunity during the pandemic and in the future, will continue growing at a moderate rate, very well conscious of the market pricing behavior. Looking back at 2022, our team is proud to have transported more than 30 million customers last year, consolidating our position as the largest airline in Mexico by passengers. To put this into perspective, we transport over 85,000 passengers across our more than 560 operations each day. This means that the number of passengers we fly daily is almost equivalent to the combined capacity of Yankee Stadium and Citi Field.

Finally, during the fourth quarter, we closed negotiations for 2023 with our labor union committing to an 8.2% salary and benefits increase. In contrast, our low-cost competitors in the U.S. having instituted labor pay increases well into the double digits, sometimes into percentages in the 30s and 40s and are still struggling to stab their operations. Approval of the labor contract, its clauses and the percentage increase in Volaris was achieved based on the new Mexican law with 88% of personnel voting in favor.

Moving on to costs and to demonstrate our commitment to low-cost leadership, we successfully get CASM ex fuel for the entire year at $0.0426 nearly the same level as in 2021. We are one of the lowest cost operators in the world. In contrast, in the United States, CASM ex fuel rose 17% for the legacy carriers and 24% for the low-cost carriers. This is not only a cost control story, but an improvement of our competitive cost position in the transborder market. Volaris now has an even better cost structure than the U.S. carriers, widening our cross-border advantage. Volaris is in control of its unit cost trend. Down the road, our cost advantage will remain as unit revenues return to normal levels.

As we affirmed at our Investor Day, for 2023, we are currently planning for ASMs to grow by around 10%. We are maintaining flexibility to add a few percentage points, should market demand guarantee or should Mexico CAT 1 be restored earlier this year. This capacity growth has been planned proactively anticipating potential challenges such as delays from American manufacturers and the availability of spare engines.

While we are convinced that moderating the pace of our capacity growth is the best decision, our long-term expansion opportunity is as potent as ever. We continue to capitalize on both switching and demographic tailwinds in Mexico and Central and South America. We are well positioned to leverage regional shifts in population and transportation trends with diversified growth areas. Our load factors are stellar and demonstrate latent demand for our low-cost offering. Our routes to the U.S. also remain popular as we continue to connect families across the continent. We are prepared to shift capacity to northbound routes upon Mexico's return to Category 1 status, which we remain optimistic will happen in the next 6 months.

Next, I would like to address specific concerns. December's winter storm Elliott. The storm hit the U.S. and affected Mexico's Northwest airports. 46% of our fleet was operating in the affecting areas. Our most important impacted airport was Tijuana. We had a closing due to weather conditions in an airport where we, last year, accommodated more than 9 million passengers, an average of 24,000 passengers per day. The closing started on the 23rd of December and was extended until the 26, affecting almost 75,000 passengers. On December 27, in just 72 hours, we regularized operations in all Volaris' systems, mitigated delays of passengers by relocated them to new flights and compensated them. Currently, Volaris has no outstanding customer complaints at the Mexican customer protection agency, Profeco.

Volaris did not have a material financial effect due to the storm. This storm could not have come at the worst time for our passengers who were trying to get home to loved ones over the holidays. We knew how important trouble was to our passengers over the holidays. Remember, our deep rooted purpose to serve our visiting friends and family mark, knowing how important travel was during the festive season, we pushed our system as hard as we could and delayed trips when we otherwise might have cancelled, all in the hope of being able to deliver for our passengers. I reiterate my deepest apologies to our customers.

All said, we did learn a lot from these circumstances. As a result, we are preparing much better recovery procedures, upgrading customer resolution software systems and dramatically improving our communication protocols, while we support improving management practices in our third-party contractors. But again, if anything, this situation is a remainder of our strength and a company compared to our peers, the financial cost was minimal and our operations are strong enough to recover quickly.

Regarding the recovery of Category 1, during the last quarter of 2022, progress was made on 3 different fronts. The FAA returned to Mexico this month to work on restoring Category 1 status and made substantial progress, closing 29 observations related to budgetary constraints and controls. The remaining 10 findings are related to changes in aviation law that are necessary and related to regulations. In December, Mexico's President submitted to Congress amendments to the aviation law that address the remaining changes required to restore CAT 1 status. The Mexican authorities expect the next FAA assessment visit by the end of March.

Finally, cabotage right within Mexico. The initiative submitted by the President to Congress in [club] some regulations to provide foreign carriers limited cabotage rights within Mexico's domestic market. Two weeks ago, industry leaders met with the Secretary of Transportation's team and Congress members to explain how well the Mexico domestic market itself and while we don't consider the opening of cabotage rights to be needed. We feel the discussions for approval of the law with all necessary regulations to clear CAT 2 have been passing and have taken into account the industry concerns. We expect the final resolution of this matter before the end of March.

Finally, as we enter the year's first quarter, we see no signs of economic deceleration, nearshoring its reducing unemployment and great warehouse occupancy is taking place in the northern states. In fact, we are seeing healthy levels of traffic and solid booking curves for the upcoming spring season. This is partially due to several tailwinds in our core markets, including the trend of nearshoring, low unemployment rates, robust remittance flows and high levels of foreign direct investment.

Now, I will turn it over to Holger, who will provide greater detail on our fourth quarter and full year commercial and operational dynamics.

Thank you, Enrique, and good morning. Despite the mentioned challenges, we diligently accomplished what we planned in 2022, growing capacity into the mid-20s, while holding controllable costs nearly flat. We finished the year driving profitability with a solid fourth quarter.

Let me give you more color on the quarter, starting with capacity. As Enrique mentioned, ASMs increased by 18% year-on-year for the entire network. This figure includes 16% growth in domestic and 24% growth in international markets. Critically, this expansion wasn't dilutive, exhibiting a solid 87.3% load factor, up from 86.9% in the fourth quarter of 2021 and demonstrating that our new routes and [debuild] frequencies continue to attract demand. Our diverse network encompasses Central and South America, allowing us to pursue profitable growth despite domestic market constraints.

Given the outstanding demand for flights, to and from those regions, we successfully passed through incremental fare increases in our international markets. In the fourth quarter, we launched 3 new routes that connect our Central American markets with significant Latin American communities in the United States, San Pedro Sula to Miami, San Salvador to Houston and San Salvador to Oakland. We are very excited about these routes as they embody the strong trends we are seeing in the VFR travel and the recovery and growth of the Central American markets.

Our international markets across Central America, South America and the United States continue to exhibit strong demand. Domestically, the routes we launched in 2022 from Toluca and Felipe Angeles are maturing as expected. We maintained around 30 aircraft flying from Mexico City International Airport and will continue in 2023. We saw unit revenue grow in tandem with capacity in the fourth quarter, with TRASM increasing both year-on-year and sequentially to $0.086 from $0.084 in the fourth quarter of 2021 and $0.082 in the third quarter of 2022.

However, the quarter story was ancillaries, which registered $41 per [passenger] a record. Ancillaries also reached an all-time high proportion of our operating revenues at 42%. We are especially pleased with these results. For one, they are stepped in the right direction towards our medium-term goal of having 50% of our operating revenues derived from ancillaries. But more importantly, greater adoption of ancillary service will allow us to keep our base fares low, further stimulating demand, extending our low-cost advantage over peers and expanding a key competitive advantage (inaudible). In addition, we will accelerate our VClub membership, which will be a tailwind to our ancillary revenues. Changes to this program will be launched at the end of this week.

We are also opening a prominent channel for customers to further engage with Volaris offerings. In January 2023, we announced our participation in FEMSA's loyalty program through OXXO, the largest retailer in Mexico, which will allow users to earn and burn daily points in an ecosystem of restaurants, apparel stores, retailers and much more. Upon launch, at the end of this April, the program stands to be one of the largest affinity platforms in Latin America with many notable brands and around 20 million users already signed on, helping us attract even more first-time flyers. As always, customer experience is a top priority for Volaris. As Enrique mentioned, our mandate to connect families across the Americas, especially around the holidays, figured prominently as we contended with acute weather effects this December.

Winter storm Elliott in the United States and severe fog in Tijuana impacted our flight service. However, it is essential to note that these delays did not reflect any deficiency in our technology or systems, but simply a disruption at the time when we had maximized our operations to enable homebound travel for as many members or families as we could. Importantly, we fully recovered flight service within 72 hours at a minimal cost, a testament to the people and technology we invested in. Discrete events aside, our operational performance was excellent in the fourth quarter with an overall on-time performance of 70.4%. We also raised the bar for efficiency, registering utilization records of around 900,000 ASMs per aircraft per day.

Our operations were unwavering as loads on our flights remained robust throughout the quarter with load factors surging into the 90s in the last 2 weeks of December during peak travel. As we look towards the first quarter of 2023, we remain optimistic as we have not observed any signs of deceleration or of a looming recession. We saw healthy traffic growth at the beginning of the year and booking curves are solid into spring. We continue to see strong consumer demand in all markets, particularly in the United States and Central America.

Now I will turn the call over to Jaime to discuss our financial performance for the quarter.

Thanks, Holger. I want to discuss our fourth quarter and full year 2022 financial results, highlighting our strong financial performance despite the fuel price headwinds we saw throughout the year. We accomplished guidance on every line, particularly on our revenue and CASM ex-fuel growth. Total operating revenues for the fourth quarter reached $820 million, a 22% increase compared to 2021, driven by higher unit revenue. For the full year 2022, Volaris reported total operating revenues of $2.8 billion, an increase of 29% compared to 2021 levels in line with our guidance despite the aforementioned economic volatility.

EBITDAR margin for the fourth quarter increased 2.4 percentage points sequentially to 25.2%, though it fell 11.7 points compared to the same period of 2021, attributable to higher fuel costs. EBITDAR for the quarter totaled $207 million, an increase of 19% sequentially though a 17% year-on-year decrease. Overall, for the full year 2022, the EBITDAR margin was 20.6%, a decrease of 16.1 percentage points compared to the 2021 figure. To note, at 2021 fuel prices, the EBITDAR margin would have been nearly 37%. EBITDAR came in at $586 million, a decrease of 27% compared to 2021.

Higher fuel costs drove total CASM to $0.08 for the fourth quarter, a 21% increase compared to the fourth quarter of 2021. Our average economic fuel costs increased by 45% year-over-year to $3.71 per gallon. Overall, for the full year 2022, Volaris registered a total CASM of $0.0795 compared to $0.0645 in 2021. Average economic fuel costs for the entire year surged 68% to $3.80 per gallon. While we are seeing jet fuel prices contract as we move through the start of 2023, we expect them to remain above 2021 levels with cracker spreads also remaining at higher levels. We will continue managing controllable expenses, [increasing] our leverage and cost and supporting margin in the periods ahead.

CASM ex fuel increased 7.9% and totaled $0.0429 for the fourth quarter. At the same time, for the full year 2022, remarkably Volaris posted CASM ex fuel of $0.0426, up just 0.3% year-on-year despite inflationary pressures throughout our operations, remaining significantly higher year-on-year. Looking into 2023, we are focusing on restricting controllable costs given this environment.

During the fourth quarter, we booked redelivery cost of $34.4 million, netted by sale and leaseback gains for a total amount of $6.6 million. On a unitary basis, this represented $0.0036 this quarter compared to $0.0018 in the fourth quarter of 2021. The ongoing transition to NEO engine option on NEO aircraft and maintenance cycle explains the increase. These cyclical events will continue onward during 2023 and 2024 and then gradually return to 2019 levels as we capture the benefits of our fleet renewal.

Adjusted CASM ex fuel, which excludes fuel with deliveries and sale and leaseback gains, totaled $0.041 compared to $0.0393 in the fourth quarter of 2021. For the full year, adjusted CASM ex fuel fell 0.4% to $0.0397. For the fourth quarter, net income was $28 million, which translates into earnings per ADS of $0.0024. For the full year 2022, Volaris reported a net loss of $30 million. However, it is essential to remember that fuel expenses drove this loss in the first half of the year and we had a solid second half returning to profitability once unprecedented volatility in oil prices stabilize.

The cash flow provided by operating activities in the fourth quarter was $168 million. Cash outflow used in investing and financing activities were 104 and $102 million, respectively. Furthermore, Volaris finished the quarter with a cash position of $712 million, representing 25% of the last 12 months operating revenue. While this was a slight reduction compared to previous quarters due to capital expenditures, these were mainly attributable to year-end maintenance and predelivery payments for our NEO aircraft. We feel comfortable with this level of capital expenditure in the short term, especially as we transition into the NEOs. The long-term payoff is clear when comparing Volaris with the most efficient carriers in the world, the main opportunity to drive our cost efficiency to the next level, reciting the transformation and ownership of our NEO fleet.

With that in mind, we worked diligently on major fronts in 2022 to ensure that Volaris is appropriately invested in its future and insulated from the volatility in capital markets that many of our peers are experiencing. Last year, we signed contracts for sale and leaseback agreements for aircraft and deliveries through 2025 and over $500 million in financing to cover predelivery payments in that period. As Enrique mentioned, we will receive our first deliveries from the 2017 Indigo order with Airbus next quarter.

As we said at Investor Day, our fleet plan is both conservative with our order book expected to grow by 6.6% annually to 2027 and flexible, we look to extend through lease extensions and straight operating leases. Having a framework of order book is especially important as the industry starts to gauge the impact of potential supplier delays, including from Airbus. While closely monitoring this, we can leverage aircraft contract expansions to mitigate the delays.

Finally, during the fourth quarter, we closed negotiations for 2023 with our labor union committing to an 8.2% salary and benefits increase. In contrast, our low-cost competitors in the U.S. have instituted labor pay increases well into the double digits sometimes into percentages in the 30s and 40s and are still struggling to start their operations. Moreover, we will continue to be conservative with our capital structure. Volaris has one of the most robust balance sheets among Latin American carriers and our global peers.

At the end of the fourth quarter, our net debt-to-EBITDA ratio was 3.9x. Our financial debt decreased by over 10% year-over-year as of the fourth quarter end. As Enrique said, 91% of our total debt comprises leasing liabilities with fixed rates. Volaris has no refinancing pressure. Our fleet comprised 117 aircraft as of December 31, up from 101 at the end of 2021. We also added 5 new aircraft during the quarter. By the end of 2023, we expect NEOs to comprise 60% of our fleet on our way to an old NEO fleet by 2027.

As of the end of the fourth quarter, Volaris fleet had an average of 192 seats per aircraft at an average age of 5.4 years with 54% NEO models. We are seeing the benefits of the NEO transition already, leading to a reduction of 1.2% in gallons (inaudible) compared to the previous year. We expect this trend to continue during the first quarter of 2023. As of today, the transition to NEOs has already represented cumulative savings of 99 million gallons or around $367 million. This is a core premise for our fleet transition, which will yield fuel savings over the next 5 years of approximately 300 million gallons or around $1 billion. We view this as the most effective fuel price hedge we can have. We are not managing for the short term, but rather to create long-term value.

Looking into 2023, we are seeing robust ongoing demand, which give us confidence that we will continue to see strong loads and unit revenues as we execute our capacity growth plan. We also expect to extend our superior track record on controlling costs. For our full year 2023 guidance, we assume an average foreign exchange rate between MXN19.25 to MXN19.75 per dollar and an average Gulf Coast jet fuel price between $3 and $3.1 per gallon. Thinking to a consideration of these variables, we expect ASM growth around 10% versus 2022. This growth rate anticipates potential challenges, such as aircraft manufacturer delays and engine availability.

Total revenue to be in the range of USD3.2 billion to USD3.4 billion; CASM ex fuel to be in the field of $0.046 to $0.048; EBITDA margin between 29% to 31%; CapEx of around $300 million, net of finance predelivery payments; and finally, the net debt-to-EBITDA ratio below or equal to 2.5x. With capacity moderating, our heavy focus in 2023 will be on profitability, mainly as we drive toward a medium-term growth of a 33% EBITDA margin.

Now I will turn the call over to Enrique for closing remarks.

Thank you very much, Jaime. To finish today, I would like to remind everyone that our triple goal from Investor Day to double revenue, EBITDAR and free cash flow from 2019 levels by 2025 remains top of mind from our team. Notably, we are 58% of the weight, doubling revenue as of December 31, 2022 and our 2023 guidance shows that we expect to advance significantly in EBITDAR and free cash flow generation this year. In (inaudible) environment, we remain disciplined on costs, prudent with capital deployment and focused on rewarding our customers and investors.

I want to finish thanking our ambassadors for the significant contributions in 2022. I firmly believe that we have a remarkable group of hard-working ambassadors and committed shareholders within our family.

Thank you very much for listening and for all your contributions during 2022. Operator, please open the line for questions.

(Operator Instructions) First question comes from Duane Pfennigwerth with Evercore ISI.

So we noticed some changes or maybe volatility in the schedules into the second quarter on Mexico to U.S. capacity. And I wonder -- I know you made some brief comments in the call, but has there been any movement on kind of the CAT 2 upgrade? Is there any chance that, that gets accelerated?

So, Duane, thank you very much. This is Enrique. We have seen the process going on really well. I mean, basically, as we said, I mean, from the 39 points that were raised by FAA, there's only 10 missing from which about half of them are related to law and the other half are systems and things that need to be put in place. We've had the FAA here a week ago, which went through the process and now they are planning to come back by the end of March. And once they come back and provided that they decide to go ahead and raise a category, there's a couple of months that requires, I would say, the process to go through into the U.S. government authorities and then we'll probably have a resolution.

I need you guys to remember that once that happens, we still need to sell the routes. So ramping up capacity from our perspective results is something only that is going to happen by the last quarter, okay? So that's, I would say, the fastest process that we can think about.

So that's kind of consistent with what you've said in the past. And then I wanted to ask you just a fleet related question on the A321s. Maybe for Holger, what sort of missions or what sort of markets are best suited for these larger gauge A321s as you kind of experiment with them in the network? Are there some markets where kind of the margin profile is less attractive? And then can you just speak generally to lease rates that you're seeing on these A321s that you're taking delivery of and how that compares to the lease rates on the aircraft that are out the door redelivering?

Duane, this is Holger. So on the A321 missions, what we've done in this year is, we've changed the mission to longer stage length. So that gives us a better cost profile in terms of generating more ASMs per aircraft per day, it makes the seat more productive. And as we see a lot of strength in the U.S./Mexico market, we did change the allocation of the A321 to more U.S. string as well and more Tijuana offline. So we've slightly changed the mission profile of A321 to the benefit of costs and revenues. And then I'll pass it over to Jaime for your question on lease rates.

On lease rates factor, remember, the first NEO that we signed, we cited the quarter we're flying in 2015. And once we -- at the time point on the market, the new ones that we are getting are substantially below that range and we're going to start getting this benefit going forward on that. In addition, as we mentioned in the call, we are getting the benefit of receiving the Indigo order aircraft and the several leasebacks are based on those new prices that we've got from Indigo.

Our next question comes from Helane Becker with Cowen.

So maybe this is easier. I just have a couple of questions here. Can you say what percent of the increase in CASM ex is related for 2023 as related to labor cost increases? And are there any other headwinds we should know about?

Most of the CASM increase is related to the fleet and basically on the delivery expenses and depreciation, not related to the labor. The labor doesn't affect or impact the increase in the CASM ex for 2023, is mainly fleet, delivery expenses, maintenance and a little bit airport costs, in particular, for the international operations.

And then my other question is probably for Holger. I think, Holger, you said that you were moderating fares in your core domestic market. And I think -- I want to make sure I got this right, raising fares in the international markets. Can you say, a, if that's correct; and b, can you say whether or not there's greater uptick -- uptake rather on ancillaries in international versus domestic? Or is it about the same?

So Helane, this is Holger. Regarding the (inaudible) we've been quite successful given the strong demand in international markets to accompany that with a fare increase both in the U.S., Mexico as well as the Central America, U.S. markets. And loads continue to be very healthy despite fare increases. In the domestic market, we have a 2-sided picture. We have the (inaudible) that are completed and there we opted to go for high load factors, stimulate volumes, stimulate markets and maintain our base fares quite low. And volume generates higher ancillary revenues, right, because people buy additional services after they buy the ticket.

And then we have 46% of our routes that are without competition that only compete against buses. And there, we have a little bit more flexibility on the pricing side and we have taken advantage of that in the domestic market as well. So that's what's happening. On the pricing side, if you look at the ancillary revenues per passenger typically what we see in the international markets, ancillary revenues per passengers are higher as well because people just take more bags on their international trips.

Our next question comes from Michael Linenberg with Deutsche Bank.

This is actually Shannon Doherty on for Mike. So it sounds like demand for the March quarter is strong in Mexico. Can you update us on demand profile in Costa Rica and the El Savador operations? And are some of the approximately 8 aircraft you're taking this year expected to be used under these AOCs to serve the U.S. market?

Sure. This is Holger again. So what we said in the past is that the Central American recovery is 6 to 12 months behind what we saw in terms of recovery from COVID in Mexico and the U.S. So we are seeing a strong rebound of demand in our AOCs in Central America, that is reflected in the high load that you've seen in the traffic reports in the past months. So we are quite happy with the development and the recovery in Central America. We will allocate additional capacity to Central America this year. We currently have 6 aircraft flying in Central America and we expect that some of the deliveries this year are going to go to Central America as well. Actually we have announced (inaudible) mentioned in the script and we will continue to develop our network in Central and South America.

And on the news about Aeromar, I know that they may not have been really a notable competitor to you guys. But can you just comment on how its bankruptcy may impact you? Maybe you pick up some share between Mexico City and the beach destinations. Any color there would be helpful.

Yes. Look, this is Enrique Beltranena. We feel very sorry about the (inaudible) operations of Aeromar. And what we're doing right now is helping the government with its stranded passengers and we have former employees to apply for the jobs in Volaris, provided, obviously, that they fulfill our internal requirements and certifications. Aeromar is important to say is, first, it was a very small niche high-priced regional airline. And as a result of that, it was really small and the impact in the market is very, very measured, okay? Very small.

I think that it's -- there's no impact in any of the larger carriers. And I think something which is really important to say is that this is probably the last carrier that was operating in Mexico with a lot of financial problems for many, many years. And I would say something which is really important, by no means, it reflects a systemic failure of the Mexican civil aviation system.

The next question comes from Guilherme Mendes with JPMorgan.

Actually 2 questions. The first one is a follow up on the guidance and the assumptions behind the guidance. So if you could share the breakdown between domestic and international out of the 10% capacity increase for the year? And Enrique mentioned on the beginning, saying that you have flexibility to adjust your capacity according to demand or according to any changes on the FAA discussion. Just wondered, what's the blue sky scenario for capacity for the year if things go right?

And the second question is related to nearshoring, is basically how should we think about your short interest leading to traffic in the short and longer term?

So regarding the breakdown of the growth rate of 10% for the year, we're seeing slightly higher international growth this year despite being Category 2 in Mexico. That is driven by the update of our U.S./Mexico routes to A321 capacity, but also the already mentioned growth in our Central American (inaudible) in the U.S. and international markets.

And regarding the flexibility on growing that from 10 to 13 (inaudible) it's basically remember that we had 6 we delivered this year. Three of them in the first half, three of them in the second half. We already were really proactively looking at potential delays for (inaudible) as we already extended, the 3 aircraft that go around (inaudible) we deliver on the first half and we have the flexibility for the second half to keep those 3 aircrafts we see that CAT 1 coming earlier. And also as an operating case, further delays from the already one (inaudible) to cover for that challenge that the industry is facing.

Finally, this is Enrique Beltranena. I want to say that our plan considers CAT 1 to be recovered, as we said, by the fourth quarter, and we have planned a shift of domestic capacity to fulfill the purpose. But we see positive progress, we wouldn't expect it to be commercially viable before this time.

And about the nearshoring question.

We believe that nearshoring continues to be macroeconomic trends that we observe in the long term, which puts Mexico in a very good position economically for the foreseeable future and we are seeing that effect in our markets, which are mostly concentrated in the northern part of Mexico. We've seen strong volume and strong demand in those markets. And we believe that, that is partially driven by the nearshoring effect and the higher employment rates we're seeing in the northern part of the country.

Yes. I was in Monterrey a couple of weeks ago, I mean, and I was in Tijuana also. And it is impressive to see the number of operations and investment of companies, enlargement of warehouse facilities. And it is important to say, I mean, there's -- for example, in Monterrey, when I was in Monterrey, there's not one single square meter of warehouse available right now and unemployment is down to 0.

Our next question comes from [Philippe Nielsen] with Citi.

So I have 2 questions on my side. One thing is, have you learned anything new from starting operating with Santa Lucia airport instead of Mexico City Airport? And the second question would be to what extent would Allegiant and the variables alliance have any impacts or route -- overlap with your route organizations?

This is Holger. I'll quickly comment on the Santa Lucia routes. We started operations in the new airport last March, so approximately 1 year ago. And the Santa Lucia routes are still in ramp up and are on track versus our original estimates. We've seen good load factors. Load factors are healthy and growing steadily. Obviously, this is a completely new airport. So it takes some time for customers to understand how to get there and what it takes to imply from there. We currently have 11 routes operating from Santa Lucia with 19 takeoffs per day. And I would say the only caveat is that the base fares are still behind Mexico City International Airport levels. And we've intentionally sustained them lower than Mexico City International to continue stimulating demand and traffic shift from Mexico City to the new airport. And as a result, we are currently not planning on adding more capacity from Santa Lucia. We are waiting for the existing routes to mature.

In the relationship, this is Enrique Beltranena, relationship with Allegiant -- we don't think it's going to affect dramatically our network because we are visiting rental relative network rather than a (inaudible) network.

(Operator Instructions) Our next question comes from Josh Milberg with Morgan Stanley.

My first question relates to your jet fuel guidance for 2023, which I believe you framed in terms of the U.S. Gulf Coast level rather than the economic cost. So I just wanted to ask what was the logic for that change, if I understood correctly. And then also, what spread you anticipate between the commodity price and the all-in fuel price for this year? And eventually, what could move that spread up or down? That's the first question.

Hey, Josh, this is Jaime. We basically use the Gulf Coast, because it is basically this is a way for you to rise to see which is the one that is impacting most of what we will do the tankering. If you want to add up by $0.40, it will get you the total economic.

Okay. That's great. I mean, so you're pretty confident in that $0.40 level for this year and don't see much variability around --

It makes a lot also to change. If (inaudible) also change the gain that we're pretty comfortable so far it has been stable over the past 6 months.

And then my second question was a follow-up to an earlier question on your CASM ex guidance. And I just wanted to see if you could give us a rough idea of what level of aircraft redelivery costs and what level of sale leaseback gains are embedded in your 2023 CASM ex guidance?

I'm just getting the number, Josh. If you have another one, I can take a look at the number or get back with you later. But it's basically $0.40, $0.44 impact on the deliveries. And sale and leaseback is minimal, $0.01.

Our next question comes from Rogerio Araujo with Bank of America.

So in my view, there was an assumption in the guidance that is basically the company capturing the jet fuel price reduction expected for the year. Can you confirm that? And if so, can you please provide more details on the competitive environment? How comfortable Volaris is with supply being, let's say, at a comfortable level this year. And also on a few hedges, if there is anything in place at this moment.

So I'll take the first question on capacity and competitive environment. This is Holger. As you recall, we grew quickly since the pandemic to build our position in Mexico and we've seen similar moves from the competitors in Mexico. Now we have met those objectives and we will return to a more historic growth rate in the high-single digits, low teens. And that's precisely what you're seeing in 2023. We're planning a 10% ASM growth rate versus 22% and that is much lower and back to the historical growth rates. And that, again, already considers Airbus delivery delays and engine delays. So that is reflected there. And we're seeing similar moderation of growth rates by our competitors. So we believe we are in -- we continue to be in a pretty healthy competitive environment.

And with respect to the fuel hedging, we don't have any position of hedging for 2023.

So, thank you very much to everybody. As we report 2022 and turn to 2023, I want to thank you, especially you, our family ambassadors, the Board of Directors, the bankers, the lessors and suppliers for their commitment and support. I look forward to another strong year ahead. And as I said during the investors meeting, I think we are just getting started. Thank you very much.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.