Equity Analysis /
Mexico

Volaris: Flash: Passenger rise continues, and fuel cost decreases sequentially

  • Volaris’ passenger traffic continues to grow (22.2% y/y), although with a lower load factor, dropping 84.7% (-4.8pp)

  • Fuel cost per gallon stood out with an increase of 80.6% y/y, while it favorably decreased 11% m/m

  • Although the long-run outlook is positive, higher fuel costs will keep generating stock price volatility

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
5 August 2022
Published byBanorte

Volaris recorded an annual increase of 22.2% y/y in total passenger traffic during July, transporting a total of 2.8 million, with a rose in domestic passengers of 24.0% y/y, while the advance in international passengers was 15.8% y/y. Capacity measured in terms of Available Seats Miles (ASMs) showed 28.8% y/y growth, whereas the demand measured in Revenue Passengers Miles (RPMs) showed a lower advance of 21.9% y/y. In this way, the load factor decreased by 4.8pp, reaching 84.7%. On the other hand, fuel cost per gallon stood out with an increase of 80.6% y/y, although it decreased 11% m/m.

Neutral implication: While Volaris' July figures continued to reflect growth, we believe that for the time being the higher fuel costs will continue to generate share price volatility given that it is still above expectations for the quarter (range of $3.8 to $3.9 per gallon), although it is favorable the fact that it has shown a m/m decrease. As mentioned in the 2Q22 report, we expect that the strategy of transferring some of the fuel price increase through fare surges and reallocating flights to more profitable routes to partially offset the cost pressure, and  sequentially improve margins in the coming quarters. On the other hand, although the long-term outlook is positive for the company, taking advantage of its leadership in Mexico’s sector, and the attractive valuation (5.4x FV/EBITDAR), the higher interest rates environment, in our opinion limits a significant multiple revaluation.