Airlines, on the other hand, usually face fierce competition and, on a historical basis, the returns from the sector have often been subpar for investors. In fairness, there are a few ways in which airlines can build a competitive advantage, notably by having a very lean cost structure - and this is where Volaris NYSE: VLRS comes into play. This Mexican ultra-low-cost carrier has challenged the legacy airlines, increasing its market share to the extent that it is now the undisputed leader in the Mexican domestic market.
The ambitions of Volaris do not stop here: The company is ready to seize growth opportunities in Central America, its backyard, but also in Colombia which could open the doors to the South American market. Central America, meanwhile, could bring further upside potential, not to mention Colombia down the road. There are, of course, some risks to consider carefully. Volaris is a recent company, founded in and operating since Volaris has grown rapidly since then, and now operates more than routes: domestic and 65 international, mainly to the United States - generally with cities that have a significant population of Mexican heritage.
The map below shows the various destinations served by the company, which has also added routes to Colombia in recent months. Source: corporate presentation. The objective is to have the lowest costs on the market, in order to offer lower airfares than competitors and gain market share. To make the most of its cost advantage, Volaris offers extremely low base fares. As a result, the company doesn't make much profit from the ticket sales, but rather, from ancillary non-ticket revenue.
It's worth noting that this strategy doesn't just compete with other airlines, but also, with travel by bus. In fact, bus-to-air switching has been a significant growth factor for Volaris. The other major tailwind underpinning Volaris' growth is the rising number of air trips per capita in Mexico, as the middle class expands. Source: Q2 results presentation.
Volaris aims to keep its costs as low as possible, but it doesn't cut corners when it comes to safety and the quality of its aircraft. This focus on a single aircraft family brings economies of scale when it comes to maintenance or pilot training. In detail, the composition of the fleet was as follows at the end of Source: company's annual report. The fleet has since grown to 92 aircraft at the end of June, and another 25 Aneo will be added by the end of , to keep pace with the company's rapid growth.
While most airlines have suffered from the pandemic, Volaris ended up benefiting from the period, for several reasons. On the one hand, the key segments for the company were the fastest to rebound: VFR visiting friends and relatives and, to a certain extent, leisure, recovered faster than business travel, which is not essential for an ultra-low-cost carrier.
Therefore, Volaris and VivaAerobus, another low-cost airline, emerged as the clear winners from the pandemic. In fact, despite Covid - and, to an extent, thanks to Covid - some trends favorable to Volaris actually accelerated:. Our efforts during the pandemic to switch Mexican travelers from bus to air are clearly paying off. Customers sight hygiene protocols, travel time and low fares as their key decision drivers. During the pandemic, bookings shifted to mobile devices and e-commerce adoption was accelerated.
This faster adoption enables us to reach out to the emerging middle class and the bus switchers. This growth is shown by some impressive traffic numbers: in August , Volaris' RPM revenue passenger miles rose As we mentioned earlier, Volaris plans to incorporate 25 new aircraft into its fleet in the next 18 months, showing the company's confidence in its growth prospects. The plan is, first, to increase the frequency of flights in the Mexican domestic market and, second, to strengthen operations in Central America and beyond:.
In addition, we plan to expand our presence in Central America with Volaris Costa Rica and El Salvador certificates of operations, and we will expand our footprint to Northern South America under the same ultra-low-cost carrier business. The start of operations in El Salvador is imminent, following the approval that the company recently obtained from the country. This increased presence in Central America is a very promising development, as there are no other ultra-low-cost airlines in the region at the moment.
Forays into new markets are never easy, but the cultural proximity makes Volaris the ideal candidate to succeed in Central America. What's more, Volaris executives Enrique Beltranena and Holger Blankenstein have first-hand experience of the region, from their time with El Salvador-based Taca Airlines.
The expansion to 'Northern South America' , starting with Colombia, also carries plenty of potential:. Finally, let's not forget that Volaris already has many routes to the U. The code-share is temporarily suspended after the U. This downgrade is not related to Volaris, but it will prevent the company from adding new aircraft to its U.
Given its rapid, profitable growth, it's no wonder that Volaris gets the highest Seeking Alpha Quant Rating of any stock in the airline sector:. As of Q2 , Central American flights represent 3. Volaris has stated that Central American routes are more profitable than its average network profitability Q1 Conference Call. Another reason to increase capacity in Costa Rica and El Salvador is that US dollars have been adopted as local currencies.
I consider Azul S. Azul is a low cost carrier that went public in April and is backed by David Neeleman, the founder of JetBlue. Similar to Volaris' story of taking market share from its legacy domestic competitors, Azul is taking market share from its competitors in Brazil. Azul's balance sheet is structured similarly to Volaris' because both have elected to finance their fleet by leasing aircraft.
DM Martins Research has done a good job of covering the bull case for Azul. It is likely that Volaris was used as one of the public comparables in setting Azul's IPO price, as you can see on the chart below that Azul went public at the same Price to Sales ratio at which Volaris was trading:.
I believe the illiquidity premium is a main reason why Volaris remains so cheap compared to Azul. Six years since Volaris went public, it is still trading below its IPO price. I am hopeful that if Volaris' shareholder base widens, and trading volumes increase, then Volaris could become valued in-line with Azul on a price to sales basis. Volaris' management might be frustrated with the lack of attention their growth story is getting in the US market.
In a departure from prior presentations, Volaris began publishing an Appendix slide summarizing sell-side recommendations in the August and September Investor Presentations Volaris Archived Presentations. Combined with a CASM decrease of 0. With continued mid-teen bottom line growth expected, that is a forward PEG ratio of 7. Earnings could continue to grow at a mid-teen CAGR over the next five years as Volaris plans to continue growing capacity at a low to mid-teens rate.
That kind of growth, combined with PE multiple expansion, could lead to momentum and cause investors to notice this under the radar growth story. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it other than from Seeking Alpha. I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: No information provided should be considered investment advice.
Please do your own due diligence. The below chart from page 15 of Volaris' Annual Report summarizes several key metrics over the last 5 years: Despite the steady increase in passenger miles, Volaris' profitability has been anything but steady. Source: Compiled by Author from yCharts data export. Spot MXN oil price as of quarter end date. Growth Levers In Mexico, per capita flights per year are 0.
Besides its low-price strategy, Volaris has taken market share and grown passengers faster than the overall Mexican flying market by pulling on three strategic growth levers: Bus Switching : For many city pairs in Mexico, flying Volaris is now cheaper than taking the bus page 15 of September Presentation. Volaris targets long distance bus passengers with marketing geared towards them.
Volaris has been able to develop new city pair routes that previously had no commercial flights.
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Volaris is a Mexican ultra-low-cost carrier, focused mainly on Mexico and Central America. See why I think patient investors stand to. Volaris still trades below its IPO price despite years of impressive growth. Macro factors have hurt Volaris' operating margins in recent. By Dave Graham and Noe Torres. MEXICO CITY, Nov 25 (Reuters) - Mexican low-cost airline Volaris bulv.shelu.xyz should be profitable and operating.