Pressure on profitability, but with sequential progress
In 3Q22, Volaris' margins reflected the impact of higher fuel costs, although to a lesser extent than expected, overshadowing the increase in revenues due to a solid demand
Although the long-term outlook for the airline is positive, until there is a clearer picture of recovery, volatility will remain in the stock price
Higher fuel expenses affect margins despite a good advance in revenues. Once again Volaris' numbers showed an increase in sales, but a contraction in margins, although this was lower than estimated. Available Seat Miles (ASMs) increased 22.0% y/y and total demand, measured in Revenue Passenger Miles (RPMs), climbed 22.2% y/y, bringing the load factor to 85.6% (+0.2pp). In this way, an annual growth in total passengers of 22.2% was partially offset by a 1.8% lower average fare and a 2.5% decrease in ancillary revenues per passenger, which led to a total revenue advance of 20.2% y/y. In turn, operating expense per available seat mile (CASM) rose 24% due to the higher fuel costs (+72.2% y/y per gallon), resulting in an EBITDAR slump of 33.1% y/y to $175 million, with a margin of 22.8% (-18.1pp y/y and +7.2pp q/q). It’s worth noting that the airline continued with cost control, recording a lower CASM excluding fuel (-0.5%). Incorporating the figures, the FV/EBITDAR multiple increased from 5.3x to 6.2x.
Demand outlook remains positive, although the recovery in profitability would be gradual. Dynamism in demand and revenue growth will continue, which reaffirms our favorable outlook for Volaris in the longer term.However, although the cost of fuel fell sequentially, it is still at high levels, which would continue to generate volatility in the stock price. This, coupled with the higher interest rate environment, limits in our view a significant revaluation in multiples.