troladora Vuela pania de Aviacion(VLRS) - 2022 Q3 - Quarterly Report

Q3 2022 Financial & Operating Performance Volaris reported increased revenue and operational capacity in Q3 2022, but profitability was significantly impacted by surging fuel costs Financial Highlights In Q3 2022, Volaris saw a 20% revenue increase to $769 million, but a 52% surge in operating expenses, mainly fuel, led to a 47% net income decline to $40 million Financial Metric Comparison | Financial Metric | Q3 2022 | Q3 2021 | Change | | :--- | :--- | :--- | :--- | | Total Operating Revenue | $769M | $640M | +20% | | Total Operating Expenses | $734M | $484M | +52% | | Net Income | $40M | $76M | -47% | | EBITDAR | $175M | $262M | -33% | | EBITDAR Margin | 22.8% | 40.9% | -18.1 pp | | Earnings per Share (EPS) | $0.03 | $0.06 | -50% | | Cash & Equivalents | $750M | $624M | +20.2% | - The average economic fuel cost surged by 72.2% to $3.96 per gallon, significantly impacting profitability[356] - Cost per Available Seat Mile (CASM) increased by 24% to $7.85 cents, but CASM excluding fuel (CASM ex-fuel) remained stable, decreasing by 0.5% to $4.07 cents, demonstrating disciplined cost control[356][363] Operating Highlights Operational capacity, measured in Available Seat Miles (ASMs), grew by 22% year-over-year, transporting 8.1 million passengers with an 85.6% load factor, and expanding the fleet to 113 aircraft Operating Metric Comparison | Operating Metric | Q3 2022 | Q3 2021 | Change | | :--- | :--- | :--- | :--- | | ASMs (millions) | 9,355 | 7,667 | +22.0% | | Passengers (thousands) | 8,125 | 6,650 | +22.2% | | Load Factor | 85.6% | 85.4% | +0.2 pp | | Fleet (end of period) | 113 | 94 | +19 aircraft | - Load factors showed monthly improvement throughout the quarter, culminating in a record high of 87.4% in September 2022[355] - Total revenue per available seat mile (TRASM) decreased slightly by 2.4% to $8.22 cents, while ancillary revenue per passenger was $39, a 2.5% decrease[356][362] Financial Statements Analysis Q3 2022 consolidated financial statements show strong revenue growth offset by significant fuel cost pressures, with asset expansion primarily in Right of Use Assets funded by increased lease liabilities, and positive but lower cash flow from operations Income Statement For Q3 2022, total operating revenues grew 20.2% to $769 million, but a 51.7% rise in operating expenses, driven by a 108.2% increase in fuel expense, led to a 77.6% drop in operating income and a net income of $40 million Income Statement (in millions USD) | Income Statement (in millions) | Q3 2022 | Q3 2021 | Change | | :--- | :--- | :--- | :--- | | Total Operating Revenues | $769 | $640 | +20.2% | | Fuel Expense, net | $354 | $170 | +108.2% | | Total Operating Expenses | $734 | $484 | +51.7% | | Operating Income | $35 | $156 | -77.6% | | Net Income | $40 | $76 | -47.4% | Balance Sheet As of September 30, 2022, total assets reached $4.42 billion, primarily due to a rise in Right of Use Assets to $2.14 billion, with total liabilities increasing to $4.17 billion, mainly from higher lease liabilities, while cash remained strong at $750 million Balance Sheet (in millions USD) | Balance Sheet (in millions) | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Cash, cash equivalents and restricted cash | $750 | $741 | | Right of use assets | $2,137 | $1,917 | | Total Assets | $4,415 | $3,983 | | Lease Liabilities | $2,659 | $2,412 | | Total Liabilities | $4,165 | $3,671 | | Total Equity | $250 | $312 | Cash Flow Statement For Q3 2022, net cash flow from operating activities was $88 million, a decrease from the prior year, with $51 million used in investing and $46 million in financing activities, resulting in a $9 million overall cash decrease Cash Flow (in millions USD) | Cash Flow (in millions) | Q3 2022 | Q3 2021 | | :--- | :--- | :--- | | Net cash flow provided by operating activities | $88 | $187 | | Net cash flow used in investing activities | ($51) | ($17) | | Net cash flow used in financing activities | ($46) | ($86) | | (Decrease) increase in cash | ($9) | $84 | Full Year 2022 Outlook The company projects approximately 25% ASM growth and $2.8 billion to $3.0 billion in total operating revenue for full-year 2022, with a CASM ex-fuel increase of about 1% and a low twenties EBITDAR margin, based on specific fuel price and exchange rate assumptions 2022 Guidance | Metric | 2022 Guidance | | :--- | :--- | | ASM Growth (vs. 2021) | ~25% | | Operating Revenue | $2.8B - $3.0B | | CASM ex-fuel (vs. 2021) | ~+1% | | EBITDAR Margin | Low twenties | | CAPEX | $145M | - The company plans to end 2022 with approximately 116 aircraft[371] Risk Management and Derivative Instruments Volaris employs a conservative risk management program, utilizing derivative financial instruments solely for hedging market uncertainties, not for speculation Hedging Policy and Strategy Volaris maintains a conservative risk management program, using derivative financial instruments strictly for hedging purposes, with all policies approved by corporate governance and subject to audits - The company does not acquire financial derivative instruments for speculative or trading purposes, using them only to mitigate risks from its primary business activities[3] - The Hedging Policy is conservative, only allowing positions correlated with the primary position to be hedged, in accordance with IFRS[6] - The company operates only in over-the-counter (OTC) markets and enters into ISDA agreements with counterparties of recognized financial capacity to minimize counterparty risk[8] Key Risk Exposures The company faces primary financial risks from fuel price fluctuations, foreign currency exchange rate volatility, and interest rate variations, actively hedging interest rate risk on its debt but not fuel or FX as of the report date Fuel Price Risk Fuel, representing 48% of Q3 2022 operating expenses, exposes the company to price increases, but Volaris held no fuel derivative financial instruments as of the report date despite its policy allowing for OTC derivatives - Aircraft jet fuel consumed represented 48% of the Company's operating expenses for the three months ended September 30, 2022, up from 35% in the same period of 2021[204] - As of the date of this report, Volaris does not have any fuel derivative financial instruments[7] Foreign Currency Risk With the U.S. dollar as its functional currency, the company's main foreign currency risk is its MXN 1.6 billion net liability position in Mexican pesos, and it held no foreign exchange derivative instruments after discontinuing non-derivative hedging strategies in late 2021 - As of September 30, 2022, the company had a net liability position of MXN 1,644 million in foreign currencies (primarily Mexican pesos)[216] - As of the report date, Volaris does not have foreign exchange derivative financial instruments[7][220] - As a result of the change in functional currency to the US dollar on Dec 31, 2021, the company discontinued its non-derivative hedging relationships, reclassifying a loss of US$109 million from OCI to the income statement[221] Interest Rate Risk The company mitigates interest rate risk from floating-rate debt and leases by using interest rate caps on its Asset Backed Trust Notes (CEBURs), with the fair value of these cap instruments recorded as a $1.7 million asset as of September 30, 2022 - The company holds interest rate caps with TIIE 28 as the underlying to hedge its Asset Back Trust Notes (CEBURs)[7][237][239] - As of September 30, 2022, the outstanding interest rate caps had a notional amount of US$100 million and a fair value of US$1.7 million, recorded as a financial asset[241] Liquidity and Credit Risk The company manages liquidity by aligning investments with obligations and maintaining funding access, with over $3.1 billion in contractual principal payments due within five years, while credit risk is minimal due to major credit card company receivables and high-credit-rating derivative counterparties Contractual Principal Payments (in millions USD) | Contractual Principal Payments (in millions) | Within one year | One to five years | Total | | :--- | :--- | :--- | :--- | | Interest-bearing borrowings | $85.5 | $156.3 | $241.8 | | Lease liabilities & return obligations | $337.1 | $2,556.7 | $2,893.8 | | Total | $422.6 | $2,713.0 | $3,135.5 | - Credit risk on accounts receivable is considered minimal due to a high turnover rate and the nature of collections from major international credit card companies[248] Notes to Financial Statements This section provides detailed disclosures on Volaris's business, financial debt, leases, related party transactions, equity, and future commitments Business Description and Corporate Events Controladora Vuela Compañía de Aviación, S.A.B. de C.V. (Volaris) is a Mexican low-cost airline with a 20-year concession extension, operating subsidiaries in Costa Rica and El Salvador, and has issued asset-backed trust notes to finance operations - The company's main concession to provide air transportation services in Mexico was extended on February 24, 2020, for a 20-year term starting May 9, 2020[161] - The company has issued two tranches of asset-backed trust notes (CEBURs) totaling MXN 3.0 billion, backed by future credit card receivables, with the 2021 issuance linked to sustainability targets for CO2 emissions reduction[166][167] - The company operates subsidiaries in Costa Rica (Volaris Costa Rica) and El Salvador (Volaris El Salvador), which started operations in 2016 and 2021, respectively[165][169] Financial Debt As of September 30, 2022, Volaris's financial debt totaled $241.9 million, comprising revolving credit facilities, two series of asset-backed trust notes (CEBURs), and other pre-delivery financing agreements, all in compliance with financial covenants Debt Facilities (in millions USD) | Debt Facility | Sep 30, 2022 (USD M) | Maturity | Interest Rate | | :--- | :--- | :--- | :--- | | Santander/Bancomext (2018) | $13.1 | Oct 2022 | LIBOR + 2.60% | | CEBUR (VOLARCB 19) | $43.1 | Jun 2024 | TIIE + 1.75% | | CEBUR (VOLARCB 21L) | $73.9 | Oct 2026 | TIIE + 2.00% | | Santander/Bancomext (2022) | $28.4 | Jun 2027 | SOFR + 2.98% | | Other PDP Financing | $73.3 | 2025-2026 | SOFR + spreads | | Sabadell Working Capital | $9.8 | Short-term | TIIE + 2.40% | - The company's primary credit facilities with Santander/Bancomext contain covenants that limit the ability to incur further debt, create liens, and pay dividends unless certain financial ratios are met[272][275] Leases and Fleet As of September 30, 2022, Volaris's fleet included 112 leased aircraft and 22 leased spare engines, with 13 new aircraft added in the first nine months of 2022, primarily through sale and leaseback transactions, resulting in $2.14 billion in right-of-use assets and $2.66 billion in lease liabilities Fleet Composition | Fleet Composition | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | A319 | 4 | 5 | | A320 | 86 | 80 | | A321 | 22 | 16 | | Total Aircraft | 112 | 100 | | Spare Engines | 22 | 20 | - In the first nine months of 2022, the company added 13 new leased aircraft (eleven A320/A321 NEOs and two A320 NEOs) and two spare engines[321][322] Lease Balances (in millions USD) | Lease Balances (in millions) | Sep 30, 2022 | | :--- | :--- | | Right-of-use assets | $2,137.1 | | Lease liabilities (Current) | $324.7 | | Lease liabilities (Non-current) | $2,334.3 | | Total Lease Liabilities | $2,659.0 | Related Party Transactions Volaris engages in transactions with related parties like Frontier Airlines, Grupo Aeroportuario del Centro Norte (OMA), and MRO/Aeroman due to shared board members or investors, with significant expenses for aircraft maintenance and airport services in 9M 2022 Related Party Transactions (9M 2022, in thousands USD) | Related Party Transactions (9M 2022, in thousands) | Transaction Type | Amount | | :--- | :--- | :--- | | Revenues | | | | Frontier Airlines | Code-share | $5 | | Expenses | | | | MRO Commercial, S.A. | Aircraft maintenance | $9,064 | | Grupo Aeroportuario del Centro Norte (OMA) | Airport Services | $6,541 | | Aeromantenimiento, S.A. (Aeroman) | Aircraft maintenance | $3,690 | - Relationships with Frontier, OMA, and Aeroman/MRO are due to common board members (William A. Franke, Guadalupe Phillips Margain, Marco Baldocchi) or significant investors (Indigo Partners)[293][296][300] Equity and Earnings Per Share (EPS) As of September 30, 2022, Volaris had 1.156 billion outstanding shares, reporting basic and diluted EPS of $0.034 for Q3 2022, and a basic and diluted Loss Per Share (LPS) of ($0.050) for the nine-month period, with no dividends declared Earnings Per Share | Earnings Per Share | Q3 2022 | Q3 2021 | | :--- | :--- | :--- | | Net Income (for EPS) | $39.8M | $75.8M | | Weighted Avg. Shares (thousands) | 1,165,977 | 1,165,977 | | Basic & Diluted EPS | $0.034 | $0.065 | (Loss) Per Share | (Loss) Per Share | 9M 2022 | 9M 2021 | | :--- | :--- | :--- | | Net (Loss) Income | ($58.2M) | $116.5M | | Weighted Avg. Shares (thousands) | 1,165,977 | 1,165,977 | | Basic & Diluted LPS | ($0.050) | $0.100 | - As of September 30, 2022 and December 2021, the Company did not declare any dividends[337] Commitments and Contingencies Volaris has substantial future financial commitments, primarily for aircraft purchases from Airbus totaling approximately $5.4 billion through 2026 and beyond, with plans to finance $1.67 billion through sale and leaseback transactions, while legal contingencies are minor Aircraft Purchase Commitments (in thousands USD) | Aircraft Purchase Commitments (in thousands) | Amount | | :--- | :--- | | 2022 | $43,950 | | 2023 | $224,629 | | 2024 | $275,363 | | 2025 | $711,069 | | 2026 and thereafter | $4,113,634 | | Total | $5,368,645 | - In November 2021, the company amended its Airbus agreement to purchase an additional 39 A320NEO family aircraft and convert 20 existing orders from A320NEO to A321NEO[348] - As a subsequent event, on October 10, 2022, the company executed an amendment to purchase an additional 25 A321NEO aircraft for delivery in 2030[350] Summary of Significant Accounting Policies This section outlines the key accounting policies governing the preparation of Volaris's financial statements, including basis of preparation, revenue recognition, and lease accounting Basis of Preparation and Consolidation The unaudited condensed consolidated interim financial statements are prepared under IAS 34, with the U.S. dollar as both functional and presentation currency, consolidating all controlled subsidiaries and eliminating intercompany transactions - The financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting[15] - The functional currency of the parent (Controladora) and its main subsidiary (Concesionaria) is the US dollar, which is also the presentation currency[17] Revenue Recognition Passenger revenue is recognized upon service provision or ticket expiration, with future sales recorded as unearned revenue, while non-passenger revenue is recognized when services are provided, and code-share agreements recognize net retained amounts - Revenue from passenger air transportation is recognized when the service is provided or when the non-refundable ticket expires[27] - Ancillary revenues (e.g., baggage fees, seat selection) are recognized when the passenger transportation service is provided[29] - For its code-share agreement with Frontier Airlines, Volaris acts as an agent for segments operated by Frontier and recognizes the net amount retained as revenue[33][34] Leases and Maintenance The company applies a single recognition approach for leases, recording right-of-use assets and corresponding lease liabilities, and capitalizes major maintenance costs as leasehold improvements amortized over the shorter of the period to the next event or remaining lease term - The company recognizes right-of-use assets and lease liabilities for all leases, except for short-term and low-value asset leases[118] - Sale and leaseback transactions are a key part of the company's fleet strategy, with the right-of-use asset arising from a leaseback measured based on the proportion of the previous carrying amount retained[126][127] - Major maintenance is accounted for using the deferral method, where the cost is capitalized and amortized over the shorter of the period to the next event or the remaining lease term[78]