Controladora Vuela Compania de Aviacion SAB de CV Q1 2025 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Michael Linenberg - Deutsche Bank Securities, Inc. - Analyst : Good afternoon, team. I got two questions here. One, when I look at your key RASM and performance down 17 percent, the $0.0776, and then I look at kind of the guidance, it looks like sequentially, your June quarter may even be worse. And on an absolute basis, those are the type of numbers that we saw back in 2022 when Omicron and COVID were hitting the industry. So my question to you is, obviously, you're driving loads with lower yields here. But the fact is, are you not seeing the level of stimulation that you would normally see in traditional discounting; and therefore, you're being forced to just take fares down to dramatically low levels here just to fill the airplanes up? What's the response to the consumer? And then what gives you any sort of confidence that the consumer will bounce back in the second half of 2025? Thanks. Holger Blankenstein - Controladora Vuela Compania de Aviacion SAB de CV - Executive Vice President - Commercial Airline and Operations Hello, Michael, this is Holger. So this quarter, in the second quarter, we experienced a benefit from the shift of Easter to April. But I would say that this shift was not the typical Easter shift and the regular seasonality pattern that we observed in previous years. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. APRIL 28, 2025 / 5:00PM, VOLARA.MX - Q1 2025 Controladora Vuela Compania de Aviacion SAB de CV Earnings Call With the unusual external forces affecting demand in the international market and also the domestic market, it's quite difficult to quantify exactly the individual factors and isolate the impacts of the forces that are currently impacting the demand environment. So the second quarter, yes, it has the Easter benefits, but we are seeing relatively low fares also impacted by the lower exchange rate. (multiple speakers)

Question: Michael Linenberg - Deutsche Bank Securities, Inc. - Analyst : I was going to say, but is it accurate that the year-over-year unit revenue decline will be larger in the June quarter than what we saw in the March quarter. Is that accurate? Holger Blankenstein - Controladora Vuela Compania de Aviacion SAB de CV - Executive Vice President - Commercial Airline and Operations Similar.

Question: Michael Linenberg - Deutsche Bank Securities, Inc. - Analyst : Okay. Okay, thanks, everyone.

Question: Stephen Trent - Citigroup Inc. - Analyst : Good afternoon, gentlemen, and thanks very much for taking my question. The first one is sort of a little bit of a follow up on Mike's question to a degree. When you look at -- I mean, certainly there's been a lot of geopolitical craziness. Everybody sees that. But when you look at price action with your shares back to COVID lows, operations' certainly not back at COVID lows or free cash flow. Any sort of high-level thoughts about share purchases at these levels, or it's not really something in the cards? Jaime Esteban Pous Fernandez - Controladora Vuela Compania de Aviacion SAB de CV - Chief Financial Officer, Senior Vice President Steve, how are you? I think our priority this year is cash preservation. And we're going to be focusing in that, Steve, to maintaining a strong balance sheet, lowering the debt, and preserving cash, not action on buybacks in our mind.

Question: Stephen Trent - Citigroup Inc. - Analyst : Okay, very helpful. Thanks, Enrique.

Question: Duane Pfennigwerth - Evercore Group LLC - Analyst : Hey, thanks. I wonder if you could just walk us through monthly trends, trying to better understand the trajectory into 2Q here. What was the RASM decline in March? How is that playing out in April? And are you seeing any signs of stabilization in domestic yet? Holger Blankenstein - Controladora Vuela Compania de Aviacion SAB de CV - Executive Vice President - Commercial Airline and Operations Duane, this is Holger. Good morning. So this March, we did not have the effect of Easter and the spring break. So we had a -- versus last year, we had a relatively weak March. However, this shifted into April, and we're seeing better results for April in terms of travel. And as I mentioned earlier, we are closely monitoring a range of indicators to assess demand trends going into May and June, while we are also focusing on what we can control, which is capacity. And that's why we've pulled back capacity for the second quarter. It's very important to note that we have a lot of flexibility in adjusting capacity, and that enables us to respond very quickly if there's clear signs of demand recovery as we go into the third quarter and the summer season. We are engaging, we are observing very closely the different distribution channels, and tracking microeconomic and macroeconomic factors to identify early signs of demand improvement. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. APRIL 28, 2025 / 5:00PM, VOLARA.MX - Q1 2025 Controladora Vuela Compania de Aviacion SAB de CV Earnings Call And the booking curves for July and August make us cautiously optimistic that there will be a recovery of the VFR traffic. We believe that VFR traffic has to travel in the high seasons to visit friends and family, both in the US and Mexico.

Question: Duane Pfennigwerth - Evercore Group LLC - Analyst : Okay. And then maybe just lastly, on the Copa relationship, how do you see that relationship playing out in Central America versus the Panama originating to Mexico, which you highlighted? Maybe to ask it a different way, how would you see your Central American operation changing, if at all, as a result of this partnership? Holger Blankenstein - Controladora Vuela Compania de Aviacion SAB de CV - Executive Vice President - Commercial Airline and Operations We don't foresee a change in the Central American operation. Our Central American operation is focused very much on VFR traffic between Central America and the US, which we would continue to service directly. And the corporate relationship is built as a bilateral co-chair, especially between South America, Central America, and Mexico.

Question: Tom Fitzgerald - TD Securities (USA) LLC - Analyst : Hi, everyone. Thanks so much for the time. I wonder if you could just help us think about the range of outcomes here, and I appreciate it's incredibly fluid. But in the event demand does recover as low as you think it will, how should we think about capacity growth in 2026? Is low double digits reasonable? And then in the event it's a more sustained downturn or the border just remains muddled, that it's depressing VFR traffic, in the more risk-off scenario, how are you thinking about capacity growth in the next year? Enrique Beltranena Mejicano - Controladora Vuela Compania de Aviacion SAB de CV - President, Chief Executive Officer, Co-Founder, Director Hi, Tom. I think it is important that we maintain ourselves focused on what we're doing right now and how to manage the situation right now. Having said that, we remain very, very concerned concentrated in managing this capacity down. So far, we are thinking about the low single-digit growth in the next year. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. APRIL 28, 2025 / 5:00PM, VOLARA.MX - Q1 2025 Controladora Vuela Compania de Aviacion SAB de CV Earnings Call

Question: Rogerio Araujo - BofA Securities, Inc. - Analyst : Yes. Hi, gentlemen. Thanks for the opportunity. So I have one here. When we are looking at previous years where Volaris delivered EBITDAR margins close to the mid-30s, which was the previous guidance, we look at the second two margins on those years, which was 2015, 21%, and 24%; and second Q margins were somewhere between 31% and 41%. And now with the guidance at 24%, 25%, it seems that it's significantly below than what the usual seasonality would indicate for the previous guidance to be reached. So my question is, what if uncertainties remain for longer? What kind of margins could we see for the year if the 6 to 16 percentage points difference on the second Q versus other years, if that is any kind of proxy or not, what you can share with us on that scenario. Also, we saw 20% higher passengers in Mexico versus pre-COVID levels, or even more than that, despite the ongoing threatened Pratt & Whitney engine recall. Do you see some kind of overcapacity in Mexico? And if that uncertainty remains for longer, would you see competitors and even Volaris postponing some aircraft deliveries or even retiring current leases? And lastly, what about when all the grounded capacity returns to the market? Does this worry the company somehow? That's it. Thank you very much. Enrique Beltranena Mejicano - Controladora Vuela Compania de Aviacion SAB de CV - President, Chief Executive Officer, Co-Founder, Director Let me try to wrap up a little bit on what you are asking. The first thing is, due to this ongoing economic and geopolitical uncertainty, we are currently unable to reaffirm our full-year EBITDAR guidance or guidance through the rest of the year other than the quarter. The second thing that is really important is -- and I think we are showing it in a very important way. A cut down from 13% to 15% of ASM growth down to 8% to 9% tells you how concerned we are to produce a better TRASM. And we are confident that these actions will lead to a sequential TRASM improvement starting in the summer, positioning us for recovery in the second half of the year. Finally, I think it is important to say that we remain concerned about the ASM growth going forward. And we are managing that again as I already told. Having said this, it's really important to maintain in the back of your minds the capacity of the company to adapt capacity up or down, okay? And we think that if we get the traction that we need, we might be changing that in a much better performance for the end of the year, okay? But I think it's really important that you guys don't make yourselves a premise that assumes that the TRASM is going to be similar to the last two quarters because we strongly think that we can get a better TRASM and an improvement through the end of the year. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. APRIL 28, 2025 / 5:00PM, VOLARA.MX - Q1 2025 Controladora Vuela Compania de Aviacion SAB de CV Earnings Call Jaime Esteban Pous Fernandez - Controladora Vuela Compania de Aviacion SAB de CV - Chief Financial Officer, Senior Vice President Just adding up on the fleet size, what we planned when we started with the engine troubles was to reduce capacity in 2024, planning in the long future, so whenever all of the engines are going to be flying again. So we already rescheduled our fleet plan with Airbus. In addition, we have 40% of the fleet is going to be leaving within the same period of time. So we can manage capacity up and down with the deliveries that we are going to be experiencing within the next five years so that our capacity matches the demand of the market. Enrique Beltranena Mejicano - Controladora Vuela Compania de Aviacion SAB de CV - President, Chief Executive Officer, Co-Founder, Director If we speak about Pratt, I think it is well understood and very well managed by our team. We do have a multi-year compensation agreement we have in place. Although I cannot provide further details due to confidentiality, we continue to work with Pratt & Whitney to improve the throughput. Having said that, we're expecting our down level of fleet to be similar to the last two quarters throughout the rest of the year. I think the strong coordination across our operations and scheduling and maintenance team has maintained operational continuity. Our schedule completion ratio is more than 98.5%, and we are confident in our ability to execute as this situation evolves.

Question: Rogerio Araujo - BofA Securities, Inc. - Analyst : Okay, thanks so much.

Question: Jens Spiess - Morgan Stanley Mexico Casa de Bolsa SA de CV - Analyst : Yes, hello. Thank you for taking my question. Just regarding the lower capacity guide, just to be very clear, the reduction versus your previous guide is mainly driven by more redeliveries, right? So how many aircraft do you expect to redeliver this year, and how much do you expect in terms of redelivery expenses for the full year 2025, if you could please elaborate. Thank you. Jaime Esteban Pous Fernandez - Controladora Vuela Compania de Aviacion SAB de CV - Chief Financial Officer, Senior Vice President Hi, how are you? We're going to be delivering five aircrafts this year. Other plans that we have, we are still managing redeliveries of 2026, which is why we have 2024, and we need to decide what we're going to keep and what we're going to extend to optimize the cost side. But if you look this REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. APRIL 28, 2025 / 5:00PM, VOLARA.MX - Q1 2025 Controladora Vuela Compania de Aviacion SAB de CV Earnings Call year compared to last year, you should have an impact of an additional $90 million plus in the redelivery line just associated with the redeliveries of this year and 2026.

Question: Jens Spiess - Morgan Stanley Mexico Casa de Bolsa SA de CV - Analyst : Yes, but I mean, the FX is already quite stronger, right? So that -- I mean, assuming it stays at the current level. Jaime Esteban Pous Fernandez - Controladora Vuela Compania de Aviacion SAB de CV - Chief Financial Officer, Senior Vice President Yes, it would be quite -- we provided the assumption.

Question: Guilherme Mendes - JPMorgan CCVM SA - Analyst : Hey, Enrique, Holger, Jaime. Thanks for taking my question. I have two quick follow ups. The first one is on demand breakdown. You speak about how VFR demand has been performing, but in terms of leisure demand, how has it been performing? And the second point is on the first-quarter yield performance. If you could break down the different effects impacting negatively in terms of geopolitical effects, how would it be? Thank you. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. APRIL 28, 2025 / 5:00PM, VOLARA.MX - Q1 2025 Controladora Vuela Compania de Aviacion SAB de CV Earnings Call Holger Blankenstein - Controladora Vuela Compania de Aviacion SAB de CV - Executive Vice President - Commercial Airline and Operations Okay, so let me take the first part of the question. This is Holger. In terms of the traffic customer segment groups most affected, clearly the VFR is currently the most affected. We're seeing relatively strong leisure demand, which is also -- and you can see it in our traffic report. The domestic load factor continues to be quite strong. That is also driven by domestic leisure travel through the beaches here in Mexico. And we -- as we mentioned in the prepared remarks, we opened two routes that are southbound leisure from the US to Mexico, and we're also seeing relatively stable and strong demand in that niche segment of ours, southbound leisure. So the VFR is clearly the most affected right now. To reiterate what we already said, in the first quarter, TRASM clearly was impacted by various factors, which includes a 20% depreciation of the peso. And if you take away that peso depreciation in constant currencies, TRASM would have only declined by approximately 7%, which is a testament to the strength of the domestic market, the relative strength of the domestic market and the leisure business.

Question: Pablo Monsivais - Barclays Capital, Inc. - Analyst : Hi. Thanks for taking my question. A bit of a follow up from previous questions, you have mentioned repeatedly this call that you can adapt to a new environment in terms of demand. But can you please provide an example of, I don't know, a period of time when demand for VFR was down and you were able to put more seats in the leisure market or in the business market and how that played out for us to try to extrapolate that experience in the past to what might happen here? That's my first question. And my second question is about cash flows, if you provide a little bit more detail on your CapEx. I think you have $250 million of CapEx this year and put a little bit more color on the items there, and also on their working capital needs. Thank you. Enrique Beltranena Mejicano - Controladora Vuela Compania de Aviacion SAB de CV - President, Chief Executive Officer, Co-Founder, Director I think we have several examples of what has happened. I mean, I remember it very well through the crisis of H1N1 in 2009, where we had a recovery. The recovery was fascinating, the way the VFR traffic recovers and the speed it recovers. The second one, I would say, is the pandemic. I want to remind you that Volaris was the fastest recovery airline after the pandemic. And it's exactly because of that, because the VFR traffic recovers very, very rapidly. And the third example is the first period of Trump, and we leave something similar in the first two periods of Trump. Probably, it's much more accentuated right now. But by then, we had a fast recovery from the VFR traffic in a very effective way. So I think we have several examples throughout the 20 years of the company that shows that the traffic recovers much more faster in that segment. Something which is really important also to mention is that we are preparing ourselves for that fast recovery. And the things that we're doing like preparing the people, preparing the lines of maintenance, preparing our IT structure, preparing our systems, everything is aligned towards that, so we can have a very fast first position in the table so we can depart in a very, very fast way. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. APRIL 28, 2025 / 5:00PM, VOLARA.MX - Q1 2025 Controladora Vuela Compania de Aviacion SAB de CV Earnings Call Jaime Esteban Pous Fernandez - Controladora Vuela Compania de Aviacion SAB de CV - Chief Financial Officer, Senior Vice President In terms of CapEx, most of the CapEx, we provide a full-year guidance of $250 million.Eexcluding PDPs, Pablo, are related with major maintenance events and engines and aircrafts. The other is minimal, is related just to IT infrastructures and things that we are working on it.

Question: Pablo Monsivais - Barclays Capital, Inc. - Analyst : Perfect. Thank you very much.

Question: Alberto Valerio - UBS Brasil CCTVM SA - Analyst : Thank you. Hi, gentlemen. Thanks for the opportunity. A quick question on my side. We have some revisions on the reports, the MDPs. We had the ASUR three years ago. Last year, we had GAP. Wondering on this environment of declining yields. How is the negotiation with the efforts? I know you have a hub in Guadalajara, but you also utilize ASUR. And you have OMA as well. So just to have an idea if you have some flexibility on this negotiation or if this is more regulatory and independent of the demand, that will be the readjustment. Thank you. Holger Blankenstein - Controladora Vuela Compania de Aviacion SAB de CV - Executive Vice President - Commercial Airline and Operations So regarding the tour situation, we've been quite vocal with the government and the airport groups that any increase that exceeds inflation is disproportionate. And we believe that fees and charges should be aligned and consistent with the type of travel segment that presents in Mexico and the customer's ability to pay. So we stand for reasonable and fair levels of those fees. And we believe that it is important that these fees are consistent with the goal of democratizing aviation and enabling more passengers to fly. So we've been quite vocal on that topic.

Question: Alberto Valerio - UBS Brasil CCTVM SA - Analyst : Thank you very much, gentlemen.