Equity Analysis /
Mexico

Volaris: Flash: Higher fuel costs overshadowed passenger’s growth

  • Volar recorded an annual increase of 10.4% y/y in total passenger traffic, although with a lower occupancy

  • Higher fuel costs (+107% y/y per gallon) will led to greater pressure on profitability margins

  • Volar will continue growing in the long term, highlighting its attractive valuation (FV/EBITDAR 4.4x vs. 7.9x 5Y-avg.)

Jose Itzamna Espitia Hernandez
Jose Itzamna Espitia Hernandez

Senior Equity Research Analyst, Infrastructure, Materials and Transportation

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Marissa Garza Ostos
Marissa Garza Ostos

Head of Equity Research

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Banorte
8 July 2022
Published byBanorte

Volaris recorded an annual increase of 10.4% y/y in total passenger traffic during June, transporting a total of 2.4 million, with a rose in domestic passengers of 11.1% y/y, while the advance in international passengers was 7.8% y/y. Capacity measured in terms of Available Seats Miles (ASMs) showed a growth of 17.2% y/y, whereas the demand measured in Revenue Passengers Miles (RPMs) showed a lower advance of 10.9% y/y. In this way, the load factor decreased by 4.7pp, reaching 84.4%. On the other hand, fuel cost per gallon stood out with an increase of 107.2% y/y at US$4.60, above estimates.

Negative implication: Although Volaris’ June figures continued to show annual growth, we believe that the impact of higher fuel costs will be more significant, which in 2Q22 was around US$4.41 per gallon on average, being 16% above the top range forecast by the airline (US$3.7 to US$3.8 for the quarter). In that sense, we expect higher pressures on profitability, although partially offset by the strategy of passing on part of the fuel price increase through fare rises and reassigning flights to more profitable routes. Given the challenging environment in the sector, we believe the company will continue with initiatives to strengthen its market position and leverage its sector leadership, being relevant for longer-term growth. In addition, we highlight the current valuation of 4.4x FV/EBITDAR vs. 1-year avg. of 6.4x and 5-year avg. of 7.9x. Meanwhile, we will keep an eye on fuel price volatility, and we will be looking forward to the results and outlook update that the airline may release when it reports 2Q22, next Thursday, July 21, after the market closes.