Q2 2022 Controladora Vuela Compania de Aviacion SAB de CV Earnings Call
[music].
Good morning, everyone. Thank you for standing by welcome to have a lot of second quarter 'twenty during two financial results conference call.
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Following the company's presentation, we will open the call for your questions and answers.
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At this point I would like to turn the call over to we're not controllable well, our senior corporate finance and Investor Relations Director. Please go ahead.
Good morning, everyone and thank you for joining the call does as our president and CEO and I think your Bill Tanona, our airline executive Vice President Holger <unk> and our.
Our Chief Financial Officer, Hi, Nicholas.
In discussing the company's second quarter 2022 results.
Afterwards, we will move on to your questions. Please note that this calls from investors and analysts only.
Before we begin please let me remind everyone that this call may include forward looking statements within the meaning of applicable securities laws forward.
Looking statements are subject to several factors that could cause the company's actual results to differ materially from expectations. As described in the company's filings with the United States, FCC and Mexico C N B E.
These statements speak only as to the date that they were made and Polaris undertakes no obligation to update or revise any forward looking statements.
As in our earnings press release, all our numbers are in U S dollars and compared to the second quarter of 2021, unless otherwise noted.
And with that I'll turn the call over to Enrique.
Thank you very much Renato and thank you everyone for joining us today.
Second quarter was again, a very challenging one.
The impact from exogenous forces and rapidly increasing fuel costs.
Other inflationary pressures were high.
As a result, we prioritized our airports so on costs, we could control.
We were successful seems CASM X fuel reported for this quarter.
At 4.2 dollar cents, which is below the first quarter 2022.
Yeah.
The company created more than 2000, new jobs in the last 18 months to execute our strategy to fill the void left by some of our competitors.
Well there is today.
Quarterly operating it's 113 aircrafts.
Our industry, leading utilization rates and flying more than 80 hours per month per cool, all while delivering high scheduled reliability and on time performance.
We were prepared for this growth as a result, we have not incurred additional costs from overtime premium pay for our people do.
This is a tribute to our operation and recruiting area.
And executed these drugs.
Having said that the company today remains that the ratio of 59 full time equivalents for.
Fuel price impact in the quarter was an incremental cost of a corner then $50 million versus second quarter, 2019, or $185 million versus the same period in the 2021.
Offsetting the hit from this highest economic fuel price was quite a challenge.
Unless the company did pass through $160 million or 75% of this impact to.
To the customers versus 2019.
Our R&R to revenue passenger.
Last name is $3, 21% higher than 2019 and up from $81 in the first quarter of 2020.
Our remarkable performance in 2021 proved to be a difficult basis for comparison.
And we were the fastest recovering and best performing publicly listed airline in the world.
In 2021 the demand for probably Mexico began to recover in March well ahead of the other geographic regions such a mix co led the global air travel resolved.
This strong recovery drove out of the ordinary volume that allowed us to post a very strong yuras.
Laurie.
So benefited in the second quarter of 2021 from vaccination travel from Mexico to the U S.
These trends led to a 36% growth before where every guard during the first half of 2021 compared to 2019.
Second quarter, EBITDAR was $107 million down 54% year over year pressured by the high fuel prices.
To illustrate the company's airports are cost control and revenue management. During this recent war, assuming an economic fuel price equal to the second quarter of 'twenty 'twenty. One varieties will have produced an EBITDAR of $292 million.
Or 42% in March.
During the second World War, Larry still top its additional capacity reported double digit revenue and our load factor closed at 85, 6%.
The rise was at record levels for the second quarter at $8 26 dollar sense.
During the second quarter total revenue was $691 million, an increase of 20% compared to the same period of 2021 and 59% versus 29.
During the quarter, we experienced several of reactions from our airports the pass through fuel prices.
When used routes passengers absorb higher prices at the slightly lower load factor.
Now we're exclusive routes competing only with the bosses, which account for 46% of our routes. We were also able to price more aggressively with little impact of yours.
Finally, central America's demand is coming back very strong.
Holder will dive deeper into this but I want to emphasize that despite possibly through March of our higher fuel costs, we have seen strong demand no pullback, thus demonstrating the VFR market resilience.
For the second half of 2022 will be more sensitive to stimulating load factors when our trunk routes, while pushing for pass through in markets that are sustaining volumes at higher prices.
We will leverage our market leadership positions in Tijuana, Guadalajara and Cancun.
The key reasons behind our strong performance since the beginning of the pandemic and success story having changed.
Well that is has demonstrated its ability to adapt to changing environments meeting the growing demand while gradually passing through the impact of the rise in fuel prices.
Second.
Despite the pressure caused by the increasing fuel prices Polaris has plenty of market opportunities both at home and abroad.
Well there is this trend continues with our beer for our customers who value our scheduled reliability and our leisure consumers attracted to our many point to point leisure destination.
Baird.
Our growth plans remain flexible our mission remains to create long term value for our shareholders.
Fourth our ultra low cost and strong balance sheet allow us to absorb volatility better than our competitors and position <unk> well for the future.
Speaking about market opportunities throughout this quarter, we took a bold step in our strategy to stimulate their travel demand in the Mexico City Metropolitan area by Rick.
Returning to two look I airports and inaugurating new routes at the Philly Bank Hello, Sir.
Both of these stations newly negotiated low cost airport contracts will expand our capacity to service their already 30 million people, who leave in the Mexico City Metropolitan area.
We also opened new routes in Central America, and increase the number of flights within and to and from the region.
The U S market also saw demand higher than brick COVID-19 levels.
Our growth has been limited in this market due to Mexico's category, two rating, which disappointing did not progress in the last F E houses of our aviation authority.
For the second half of the year, we still have space for two additional aircraft to operate from Mexico to the U S.
In the medium term, we're adjusting our network growth plans to the U S. Given the.
The recent get to results.
Long term growth opportunities are not in jeopardy.
I always cost more than 300 potential new routes not yet serviced.
In turbulent times, one of the most important functions, mostly focused on strengthening the balance sheets.
Well there is two several important achievements during the quarter.
We generated positive cash flow, we've firmed up financing for our fleet growth through the end of 2025 through sale leasebacks, and EVP financing or more than $500 million. We finished the quarter with net debt to EBITDA ratio of two nine times with no.
No refinancing risk in the foreseeable future.
We have more favorable financing conditions compared to our Latin American beers and have not taking on the debt incurred by our North American competitors.
Well there is a cheap terms and conditions for a spare part pool contract, which provides the company a 10 year deal at a lower cost than our previous contract despite with Glastonbury pressures.
This is an important block of the effective cost control measures, we implemented to offset inflationary pressures and commodity incremental costs.
We have grown quickly over the last two years to fill the void left by some of our competitors and we have now met these objectives. Therefore, we will return to a measure of growth rate in the upcoming years, most likely moderating our work.
Passive growth rate to a single digit level in 2023.
Our focus is to achieve a healthy balance between growth and profitability.
Painting, a strong balance sheet.
And our competitive cost advantage.
Now I'd like to hand, it over to Olga who will talk more about our quarterly operating results and cover our mitigation strategy for rising fuel costs. Thank you Enrique I would like to provide some more color on our quarterly operational results on the revenue side as we can.
Pointed out demand remained strong in both our domestic and international markets accommodating increase in Paris, as we sought to mitigate the impact of fuel cost at rose throughout the quarter.
Fuel costs were $26 per passenger higher than in the same period of 2021.
Our loads continue to demonstrate sustained strength in VFR and leisure travel, although close in bookings moderated slightly in June like in part, reflecting the fifth waves of the pandemic in our markets. Nonetheless.
Nonetheless, overall strong traffic and higher fares resulted in strong PRASM performance.
Throughout the quarter, we reported a healthy traffic performance both in April with load slightly better than in 2021 and in May.
With bookings improving sequentially.
And falling in line with the strong 2021 performance in June close in bookings contracted slightly as we attempted to accelerate fare increases.
We expect that concerns of an upcoming downturn in the global economy may newly constrained travel decisions and we will carefully monitor booking trends to set fares as we manage elevated jet fuel prices keep in mind that we faced a difficult comparison basis from the second quarter of 2021, and then we could discuss.
Right.
To that point the surge in fuel prices during the second quarter was ultimately to high to offset by passing the cost onto passengers without impairing demand, we were able to recoup significantly less of a few costs this quarter than in the recent quarters as few as economic fuel price we paid for two.
$4 40 up more than 105% year on year and exceeding the highest levels in the company's history for the entirety of the quarter.
We see these elevated fuel prices as transitory and while we do not have a line of sight on potential relief. We are focused on stimulating demand for our routes.
So we will continue to push fares, but not to the detriment of our long term strategy of demand creation.
One last note on the impact of fuel.
<unk> already account for 50% of our fleet and these models of up to 15% more fuel efficient, helping us offset fuel cost pressure.
We have a unique network that is flexible to add or reduce capacity, we have 46% of routes without air competition and leadership positions in key Mexican cities.
That gives us more resilient on pricing and some of our competitors.
But we still need to remain competitive versus the buses.
We attribute our continued stable performance this quarter to our unique position of taking advantage of the bus switching momentum while expanding our capacity to serve this market.
While we are cautious about economic pressures heading into the second half of the year.
Both leisure and VFR markets have continued to show strength.
As a reminder has very little business traffic.
Therefore, we are still able to maintain demand and fare increases.
Especially in the international market, despite elevated fuel costs.
Speaking about capacity, our S and rose by 4% from the first quarter or by 19% versus the second quarter of 2021.
Turning to our geographic breakdown.
The second quarter domestic network, representing 70% of <unk> grew by 17% year over year.
While most of this growth continued to be on existing routes out of Mexico City International Airport.
Due to the government led reduction in capacity, we have reassigned four out of our 40 aircraft there.
Two each to Luca and Philippe analyst airports.
International capacity grew by 25% year over year with the greatest contribution coming from the Mexico, two yes market.
But we also saw healthy growth despite the vaccine related surge in travel to the U S last summer.
We also grew in central and South America, where we have initiated several inter regional routes, where we are the only low cost carrier. We finished the quarter with five aircrafts domiciled in our central American operating certificates.
Ancillary revenues continue to be a large part of our overall revenue mix. These consist mainly of baggage seat selection and bundles like the flexibility combo with.
We also further drove growth in ancillary revenues this year by adding members to our discount programs and expanding the number of co branded credit card members.
40% of our overall revenues were from ancillary for the quarter.
And we reported ancillary revenues of $37 per passenger.
We remain committed to our medium term target of 50% of revenues from ancillary.
We are also focusing on increasing our intra Mexico flight options and undertaking a plan to increase and better balanced our flights in the Mexico City area.
To this end in addition to our flight from Mexico City International Airport, we have opened flights into Luca as well as the Phillipe unconvinced airports, becoming the first airline to operate at all three airports that service the Mexico City Valley.
The decision to operate from all the airports of Metro Mexico City was made considering the current context.
In Mexico City International Airport is saturated and there will be little growth opportunities in the future as pre pandemic capacity has been backfield. Additionally.
Additionally, we reached a highly favorable cost agreement with the administrators of to look at airport, which in addition to being the station wherever life started operations in 2006.
It also now help us keep our costs low for travelers going to and from Mexico City.
Moving some of our flights to Philippe Angeles Airport will also help us keep prices down to Luke and Philippe analyst are cheaper for Polaris and our customers compared to Mexico City International Airport.
This is in line with our customer segment and the U L. T C business model of offering point to point flights.
All of this equates to an exciting opportunity for increased customer demand for our routes as there is significant room to grow at both secondary airports in the years to come and at the right operating cost levels for the <unk> business model.
These additions however, do not mean that we are abandoning Mexico City International Airport, we will continue to offer the same routes to and from this airport, but at slightly reduced frequencies.
Which will allow us to provide flight service to the other airports.
Overall, we will increase our total seat offering by 1 million seats per year in the Mexico City Metropolitan area.
With better frequencies and scheduled reliability, serving the most important market in Mexico, a region with approximately 30 million inhabitants.
Moving onto fleet, we ended the second quarter with 113 aircraft for the same period last year, while ours had 92 aircraft, making 423% fleet growth.
We maintained high aircraft utilization during the quarter with 13.2 hours per day for a productive feet importantly.
Importantly, while ours has one of the highest utilizations globally when measured against other airlines with similar aircraft types and business models and again, even though ASM growth remained strong at 20%, we continued to stimulate demand and maintained healthy load factors.
We constantly monitor and adjust capacity based on market dynamics in May we decided to cancel the nine underperforming routes effective July 31st.
Looking ahead to the third quarter and the second half of the year.
Summer travel and the ongoing demand and VFR and leisure should help drive traveling performance, particularly in the international markets.
While our international capacity growth is constrained by cabinet category do we still have levers available to improve our current U S capacity, including increasing frequencies and deploying two additional aircraft that we are still allowed under the faa's limit.
Our presence remains strong in the U S. As we are the third largest non U S. Operator in the L a and Chicago markets.
Additionally, we will continue to seek expansion in central and South America, where we are currently underpenetrated.
Especially as middle classes emerge there similar to Mexico.
We are introducing the ultra low cost low fare model too many of those markets.
Furthermore, for the second half of 2022, we are closely monitoring 2% to 3% of our capacity should feel cost pressures remain for the third quarter 'twenty. Two we have a contingency plan in place to reduce capacity by up to 5% during the traditionally lean months.
September and October to protect our profitability.
We grew quickly since the pandemic to build our position in Mexico.
Now we have met our objectives and we will return to our historic growth rate looking.
Looking ahead at 2023, we are planning a single digit ASM growth versus 2022. This number will of course be dependent on Airbus delivery schedules.
<unk> currently operates at all but nine of the 45 commercial airports in Mexico, and we see promise for increasing our 98 daily flights from Guadalajara, and our 95 daily flights from Tijuana.
Markets with metro populations of $5 three.
And 2 million respectively.
Our priority for network growth is to deepen frequencies on existing routes in.
In the last decade with ours as cheaply efficiently and safely flown over 10 million first time domestic players and.
And we expect that the new passengers we reach.
We're joined them in switching from the bus won't experience once experiencing the advantages with Larry's offers.
Over the next five years the four main pillars of Polaris investment thesis that is Mika mentioned earlier still stand.
We'll continue to benefit from organic GDP growth population growth, a large and growing middle class in Mexico, and the continued switch from long haul boss to air travel and exciting story that we will continue to capitalize upon.
I will now turn the call over to Jaime to discuss our financial performance for the quarter. Thanks.
Thanks Corridor now I will like to discuss our second quarter 2022 financial results.
As detailed by Enrique total operating revenues for the second quarter were $691 million at 20% increase compared to 'twenty to 'twenty, one due to higher capacity healthy load factors and a solid need revenue.
Gasoline fuel decreased 1% compared to the same period of 2021 closing at 4.2 cents due to our disciplined and efficient cost control and higher aircraft utilization, which offset the inflationary pressures it.
It is important to reiterate that we operate with one of the law with gasoline material levels in the world, which allow us to remain confident in our strategies in the face of HIFU prices and an inflationary environment.
During the quarter, we booked sale on leaseback gains for a total amount of $12 $8 million and with delivery accruals of $25 million.
Higher fuel costs drove total castle, the weight 0.5 cents for the second quarter.
35% increase compared to the second quarter of 2021.
The average economic fuel cost increased by 107% to $4 $4 per gallon in the second quarter.
All of our lives. This ambassador receiving the second quarter, I will deserve and meaningful profit share payout due to the last year's performance, we thank them for their commitment and excellent work.
In this environment of HIFU prices, we believe that the renewal of our fleet with new aircraft in high density seating strategy is an effective hedge against rising fuel prices.
That our first need to move up less than our competitors equally important there are key elements of our 2030 goal of reducing carbon emissions over revenue passenger kilometers by 35, 4% compared with 2015.
Net loss was $49 million in the second quarter, which translates into a loss per share of four cents and a loss per avs are 42 sets.
Higher fuel costs costs, a contraction in our EBITDAR margin.
EBITDA decreased 54% to $107 million and the EBITA margin diminished by 'twenty five three percentage points to 15, 5%.
Net cash flow generated by operating and investing activities in the second quarter were $158 million and $30 million, respectively. The cash flow used in financing activities was $183 million.
Furthermore, Malawi delivered cash generation of 9 million for the second quarter closing with 759 million in cash and cash equivalents, representing 30% of the last 12 months of operating revenue.
Well Larry has one of the most robust balance sheets, among Latino Maria carriers, and our global peers.
The end of the second quarter, our net debt to EBITDA ratio was two nine times compared to four five times in the same period of 2021 and two three times in the first quarter of 2022.
Around 93% of our total debt is made up of leasing liabilities and we will not have the refinancing pressure than many of our peers globally will face in the upcoming years.
Importantly, we have signed sale and leaseback agreement for all the aircraft deliveries from our book quarter with Airbus through the end of 2025 and have finance pre delivery payments of more than $500 million for that period on competitive conditions.
We incorporate the nine new <unk> hundred 20 Neo aircraft in our fleet during the second quarter.
You have 30 malaria is fleet was composed of 113 aircrafts with an average age of five four years old obviously as fleet had an average of 190 seats per aircraft.
84% of its aircrafts are sharklet equipped.
The percent of new engine option or new models.
We expect to win 2022 with approximately 150, new aircraft, depending on Airbus deliveries scheduled compliance, which will increase the Nielsen 254% of our fleet. This includes the reason library of two 819 seals in the month of September .
Despite the global macroeconomic and geopolitical challenges demand remains robust throughout the network.
Given the higher than expected increase in fuel prices compared to our prior forecast we are updating our full year 2022 guidance.
We are adjusting downward capacity guidance in terms of a cent from mid twenties to a range of 23% to 25% compared to 2021.
We call our revenue guidance in the range of $2 $8 billion to $3 billion.
We continue to expect our full year CASM ex fuel to increase between one and three per cent compared to 2020 one.
We are updating our EBITDA margin guidance from the high Twenty's to the low twenty's fully explained by the higher average fuel price.
Finally, we confirm our capex outlook in the range of $140 million to $145 million.
Our outlook assumes.
Full year average exchange rate between 25 to 21 seven vessels per dollar and an average economic fuel price between three seven to 3.9 dollars per gallon.
Also it assumes no significant unexpected disruptions related to COVID-19 macroeconomic factors or other negative impacts on our business.
And for the third quarter, we are budgeting, an exchange rate of 21 to 'twenty two pesos per dollar and in economic fuel price of 3.8 to $3 $9 per gallon for the quarter. Therefore, we expect an EBITDA margin in the range of 19% to 21%.
<unk>.
We are returning to a balance of growth and profitability with focus on maintaining a strong balance sheet.
We will continue to execute a disciplined ROIC strategy with the flexibility to adapt to macroeconomic volatility brought by geopolitical events relying on our ultra low cost model now I will turn the call over to Enrique for closing remarks.
Thank you very much Jaime our mission remains to create long term value for our shareholders. We have a resilient and effective ultra low cost business model with CASM X fuel under control.
Solid operational performance, a strong balance sheet with healthy leverage and most importantly, the commitment of an experienced management team to navigate our airline through these challenging environments.
Finally, we invite you to read the word 2021 integrated annual report detailing our ESG progress and commitments. The report is available in our investors relations website. Thank.
Thank you very much for leasing and operator, please open the line for questions.
Thank you.
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Yes.
Yeah.
Our first question will come from Stephen Trent from Citi.
No go ahead.
Good morning, gentlemen, and thanks very much for the time.
Just one or two quick ones for me the first.
I think you mentioned you are servicing.
You said, all but nine of.
45 commercial airports in Mexico.
When do you think about the ones youre not servicing.
You know are the main issues regarding exorbitant landing fees.
Or just maybe the routes that don't make sense at the moment just curious about that.
Steven Yes.
Smaller airports and smaller markets.
We have prioritized for later.
<unk>.
So right now they are not that attractive for us.
Great.
Speaking, although their issue Steve good morning, and thanks for your questions.
Speaking of other over there you can save in the Caf two is strong and one of the things that concerns us.
And we are working very strongly to try to support.
Alright.
I think thats that something really important other than that we don't have any major issues.
Great. Thank you Enrique and hold or.
Yes Super quickly.
Just love to hear on a high level you know what.
What's sort of body language you are seeing from your.
Our domestic competitors.
But on pricing.
And add capacity to an appointment that and that's it for me thanks guys.
Well okay.
The pricing environment.
Still been quite healthy.
Throughout the year.
We are seeing a decent gene from most of our competitors.
Growth in capacity or have been focused on the Mexico City Metropolitan area with Aeromexico in vivo also growing in these markets.
We have taken the approach to diversify our presence in the market by growing at two new airports in the Mexico City area.
Okay.
Okay, Let me leave it there are many thanks guys.
Thank you, Steve and thank you Steve.
Our next question will come from Duane.
<unk> <unk> with Evercore ISI you May now go ahead.
Yeah.
Hey, guys. Good morning, how are you.
A very good way and thank you good morning, Brian .
Thank you good just on the single digit growth in 2023.
The growth rate was going to come down next year I think you know the company was kind of messaging low teens.
So just in terms of the difference what is the driver is it is it delivery rates in other words would that single digits be low double digits. If you could get more planes or if your confidence in getting those planes was higher.
Is it the shift in the cat to timing or is it or is it something else.
No I think the company made during the last two years Duane we have been feeling good holes at the reduction of capacity of some of the competitors had the reasoning. During this couple of years and that's why our growth last year was 29% and <unk>. We are guiding you to 2000.
$3 25 for this year.
And something which is really important delays we are concerned about the capacity that is in place. We are concerned about that they've got to get that capacity might be forced to stay in Mexico and make us a little bit of a price.
Pricing pressure, so we are absolutely being.
I'd say conservative in our growth.
You said that I want to remind everybody I mean, when we have this issue.
During the pandemic and we've decided to freeze a fleet of 80 786 aircraft back then and then we grew up from 87 aircraft.
Very fast. So this company has the possibility of growing or shrinking in a very very flexible way and that's one of the beauties of older model.
Okay, I don't want to I don't want to put words in your mouth I don't want to lead the witness, but it but is it fair to say that you feel like the margin outcomes in 2023.
Will be higher.
With a with a single digit growth rate relative to a you know a mid teens growth rate that you need to sort of let some of this capacity growth mature.
Yeah.
Hello.
No Duane I don't see that happen could you clarify the question. Please Duane yeah.
I guess I guess the simple the simple answer one answer to the question I'm asking is you know we feel like our margins will be higher in a scenario, where we slow down our growth rate I think investors. Appreciate all the growth opportunities that that Polaris has I don't think thats. The issue I think the concern has been the rate of capacity growth.
While you're posting margin degradation and so you know is is the slower growth rate a function of margin focus or just delivery rates or something else.
Basically what we are doing is now after we have a really high growth over the past two years, we're going to a biologic growth with profitability.
So the way the world is what we are singling out.
Single digit growth next year.
Because we are taking that approach obviously, if we see a strong demand we can increase it.
Great very fast and next year, we have seen with delivery of aircraft.
To what extent that means the demand is there we don't see it right now so with Blackstone to return them and that's basically the game plan that we are looking for next year.
Hi, Miss response Duane.
Our scheduled delivery with Airbus as being pretty good.
Were expecting probably a two months delay you'll make it 24 months delay on when he wants but thats it I mean it.
It's not driven by the fact that we're seeing a problem with deliveries with Airbus. We had when we program deliveries. We included these delays in our schedule on the way home.
Scheduling the aircrafts. So it has nothing to do with that.
It's most mostly driven by where we see the capacity in the domestic market, where we see inflation, where we see demand contractually if something really happens, but we keep our flexibility in the aquifer were matched.
Okay. That's good and then look you touched on operational performance.
But it's probably worth repeating how have you can.
Can you just replay your completion.
And factors in your on time performance, how has that trended over the course of the second quarter are there any airports in the U S or otherwise what are you seeing staffing constraints.
Impact your reliability.
So duane.
We have not seen the operational issues that many international airlines in the U S and Europe are facing.
Our on time performance has been on target and our scheduled completion as well.
The labor shortage issues regarding pilots and ground staff and it has not.
The major factor here in Mexico, nor in our U S operations.
Do you have any delays in the U S operation driven by staffing constraints there.
Yes.
Okay very good thank you.
Okay.
Our next question will come from Helane Becker with Cowen you may not though.
And it's very much operator, hi, everybody and thank you very much for the time just a couple of questions from me to my first question is with respect to <unk>.
The.
Strong traffic the fares and N T RASM.
Do you do you think that.
Do you think that that demand relative to them.
You are.
We will continue.
And how are you going to maintain your high load factors in an environment, where customers may push back against that.
So let me.
Elaborate a little bit on the fare environment and the pass through so so lately.
In June .
I would say the last half of July we've seen some more difficulties to raise them.
Fares and some of our trunk routes and we see that we are reaching a ceiling of the pass through in some of our main trunk roots here in Mexico. However.
In exclusive routes and U S routes and in Central America.
Those those markets are absorbing close in fare increases much better.
Also.
We have to note that we are seeing robustness in advanced purchase behavior that we did not see in 2021.
For the second half of the year.
The bookings booking curve for the rest of the months of 2022 are ahead of 2021 levels.
As of today and that indicates to us that the demand continues to be quite strong and we are happy.
Happy to see more advanced bookings that we saw in 2020.
I think that that's supposed to call I think holders Huggers response is perfect.
I think you guys need brought it to sink a little bit of flux going on here.
When we analyze our second quarter of last year and obviously the summer of next year, we lead with what you guys are leaving in the U S. In Mexico. Okay. So so we already did that ramp of.
I mean in general fares and in Chile.
During the second.
Third quarter of last year, and then our our our DRAM. Despite it has been high because of the pass through of the chairs.
It's not having that.
No matter, what you guys are leaning into the U S and we.
We feel that our market in Mexico is now much more stabilized.
A year later than what you were leaving in the U S and the concerns that you were having in the U S in domestic market and.
We're seeing our transborder traffic kind of healthy and stable, but not with those huge incremental shares that you have all over the place in the international markets from the U S and outside of the U S.
Okay, Alright that is hugely helpful. Thank you and then my other question is with respect to operating after three Mexican Mexico City airports ride out.
So I get the I get the reason and I think you were talking about the fact that they are less expensive to operate than Mexico City is.
And to look at and Philippe unjust, but.
Hmm.
Like what's the Kaufmann area and how much and when people buy into those two airports where are they going.
And what does it cost to get from those two airports like the center of Mexico City is is that it's the savings on the air fare kind of upset by higher.
Higher ground transportation costs or is it just that they are less expensive to operate in the ground is the same generic I mean, I might be saying that not really well that that's kind of my question, Yes, Yes, I understand your question Helane the nice thing about the Mexico City Metro area is that it's a very.
Dodge market it has a 30 million inhabitants.
In total very similar to big metropolitan areas around the world.
And we have three distinct catchment areas.
For the three airports.
To look at the <unk> West of the Mexico City.
Large population health and to look at captures the markets of the Western part of Mexico City. That's one then we have plenty back late in the North of Mexico City with some large Cds around that area as well with about five to 6 million inhabitants living closer to Phillip bank listen to exit.
Sydney International Airport, and then we have the large Mexico City International Airport.
So it's more of a 10th of Mexico City. So it's very comparable to other metro areas around the world with three airports servicing distinct catchment areas.
That's great. Thanks, Hoeger, Okay. Kim Thank you for your help.
I think Lee, yes, I made the problem. We're having is people are still thinking about those secondary airports like they would be a replacement of it we will face A&D.
No our minds those two airports are.
Complementary to <unk>.
The main airport.
I think the most important thing of the whole strategy and maintenance for the last.
10 years, when we basically left to Luca.
In the dorm room and made it impossible to operate deluca, because we couldnt, we couldnt afford the cost of that to your point okay.
And the beauty of not that's going on now is is yes. So it since 2014, Mexico City has been basically gapped.
Possibility of growing in the Metropolitan area was basically impossible because of those costs now that we have negotiated those those lower costs in those airports.
And dramatically reductions on Ddos and dramatic reductions in cost.
Allows golar is to play strategy of growing in these 30 million inhabitants population, but we're not playing around moving people from very far away from those airports were playing around the catchment areas, which is older explaining and thats probably the most important thing.
Understood guys.
When we compare the number of operations that we have in Q1, our fourth quarter market, which is about 8 million in how it turns around.
Sorry.
8 million inhabitants, and we'd have an umbrella ratios.
When we.
It's fair birthday.
Confer.
$2 8 million inhabitants around around declining we have almost 100 operations there and we can provide versus Mexico in the metropolitan area operations that we have we only have 200 slides 30 million even having done.
Population. So we think we can multiply we're structured around the metropolitan area in four to five times and still be profitable and viable with segment that our VFR segments, which are really important for us.
That's really helpful. Thanks Enrique.
Yeah.
Our next question will come from Josh Milberg with Morgan Stanley You May now go ahead.
Hey, everyone. Thank you very much for the call. My first question is just a clarification on the situation with the Mexico City airports you all commented at length, but.
And I understood that with the favorable airport agreements and that you are expecting to be able to significantly expand your seat offering there, but I was interested in hearing about how you know the situation there is going to affect your near term capacity levels and in that.
Market in Mexico City, just because I think not so long ago, you were contemplating the possibility of some the possibility of needing to scale back on a near term basis. So I just wanted to clarify that.
Youre not just talking about the longer term you talked you also talking about near term no impact on capacity in Mexico City.
So let me let me go through <unk>, specifically in the last two years, Josh we did build our decision that that you see and maybe consider vintages disappears.
Now we have met our objectives.
This again after the pandemic various actuaries.
And.
That's the first the first feet okay.
One thing is I truly.
So the only thing you'd guys need to do.
Joining me.
To remind you guys that we are unknown.
And typically the alternative was curious do move up rates remain of airports. So as these reports tend to become very high cost and high share.
And I think what is going to happen in Mexico city because of the situation going forward, it's going to it's going to be like a boutique.
And it's going to be very extensive and thats not the traffic from Bernard Okay.
Having said that.
The secondary airports in Mexico are in the very early momentum.
And what are those things that saturation that HCM is real and our main concern.
We feel that saturation.
Also it is about safety.
So when there is things that we need to maintain a decent number of operations of dice Amy.
She said it is the most important traffic airport today.
Provided that we make profit eight and that we will not jeopardize safety.
And when there is working with the airport demanding application of <unk> worldwide <unk> guidance. The global UA is G simple rules for slot allocation and best practices to achieve transparency uncertainty for all players, but again, we will not jeopardize IC.
The approximate population around this is to look at airports has been mentioned and ability to serve this population west lead by focusing only on Mexico City now we can do it differently.
And that's pretty much what we're planning.
Having said that it is very important to tell everybody. We will not be read do you see further capacity from where we are at the end of September 15th which is the second.
We have a 10% reduction in August and at 10%.
In September but then we are planning to stay there and have the right participation, but taking care about safety, which is probably one of the most important things guys. We cannot lose safety from our site and one of the most important thing that the.
Investors of these companies have are relying on meats.
They care about safety and I will not jeopardize that.
Okay, that's great and Richard Thanks, Thanks for that clarification very helpful. And then my second question was on the Cat two ish or you just talked about.
The lack of progress with it.
And I was just hoping you could provide a little more perspective on what's going on there and how we could expect things to evolve from here.
So in terms of the FAA conductor conducted a technical revision.
Which was part of the steps that we have to go through the process of recovering.
And obviously I'm talking about the Mexican Federal agency I still hear a lot of people thinking that this is a narrowing on problems. This is this is everything its about our.
Agency aviation.
It has nothing to do with areas.
And the problem we had is.
They've been managed well.
Yes.
And defending the right weight I mean, originally we had 28 points that's raised a year ago in those 28 points in reality when you open them. It takes you to about 100.
And the way they defended those points, where it's very unfortunate.
In.
And.
She is.
It was unfortunate because they have the documentation base had the support they have everything but David maybe even prefer themselves too I'm sure you can even do a little of onshoring things that were.
Not to take the things that they have their processes.
Davidson.
In the deposit depositary fires.
As a result of that being raised another 38 or nine points, which was very unfortunate.
I don't think the points are very different from the others. That's my perspective.
I don't think they did affect that right in the right ways to legal.
Stages that they have sorry.
Sorry, if you said data from the legal perspective.
So we are preparing ourselves.
I mean, we move back we are.
Helping them to defend themselves in a much better way and trying to organize themselves around the right issues.
On the right things to be deferred.
Unfortunately, yes, it is unfortunate.
Sure.
But it's not something that is.
600.
<unk> said that its going to take us at least six months more.
And that's the challenge I think from <unk> perspective, what is very important is that for the second half of the year as older said, we still have space for two additional aircraft to operate for mix to the U S and in the medium term, we're adjusting last year, where network growth plans to the U S.
You didn't as a result, but long term I mean.
Growth opportunities are not be jeopardy, and we're learning.
More than three partner potential immune routes not yet serviced when a lead gen continues growing and sustaining our operations in a profitable way going forward.
Yes.
Yes.
Wonderful great coloring, Richard as always have a nice day.
Thank you very much Josh and thanks for the questions.
Yes.
Our next question will come from Mike Lindenberg with Deutsche Bank, You May now go ahead.
Oh, Hey, Hey, good morning, everyone. I guess my first one just a tiny can you remind us about or maybe older can answer this as well just on seasonality what what your strongest quarters are from a demand perspective, and presumably profitability follows demand.
Yes, so the third quarter is typically seasonally.
The strongest followed by the fourth quarter.
We're looking at the second half of the year being the stronger part of the year.
Yeah that which that that sort of brings me to my next question because when we think about the guidance for the third quarter.
That EBITDAR margin, you know is 500 basis points better than what it was in the second so I guess, there's seasonality there but is it is it only seasonality there or are you.
You know I guess, you're assuming a lower fuel price right youre looking at where the fuel curve is because youre not hedged and then presumably that fourth quarter.
Just to get the math of the low twenty's on the EBITDAR margin Youre, assuming an even better margin a better step up from the third quarter or is that the right way to think about it.
That's correct Michael.
Okay is there anything else. So it's it's straight up it's you're just looking at revenue growth and demand trends and I realize it's hard to get an early read on bookings and you're sort of looking at where that fuel curve is but its nothing else theres no other cost savings or cost tailwind or credits that you think you'll get in the back part of the year.
Yes.
We always focus on cost Michael it's something that we're watching every single there we are not extend from the inflationary pressures that everyone at <unk>, particularly in our U S operations, but we stick to that guidance at all.
On the on the gasoline.
X fuel growth for the year, which is challenging but it is something that we constantly monitor and constantly look at.
But we find something that was less so.
So the company Michaels has a determinant action on costs and we do have a program a program with targets of strategic things that we need to reduce during the year and Jaime executing in an amazing way.
On top of those issues, Okay I see.
What is important to consider is when you look at our unit cost without fuel from the first quarter.
And then you compare it versus the second quarter.
We have a reduction of that.
In fact, these reduction of that unit cost and even if you take away. The profit did we deal on the sale leaseback. Our unit cost is still lower than in the first quarter, Okay, and Charles you I mean, how long how we are managing in an active way our unit costs, having said that among I mean.
We calculate our effective inflation since 2019 were talking there that we've been through a process that has been some.
Kind of around 18% of inflation cost.
The company has been managing and reducing and reducing costs every quarter every quarter we were born.
A better performance here and in other than when we had a capacity issue in the pandemic, okay, but but what do you need to do to look at it is we will eventually have at least 3% impact.
And Andrew I.
I mean, despite holder and all his scheme in the operations and maintenance teams that report the vulgar manage this in a very aggressive way and Jaime is controlling it.
To access this.
Right.
18% inflation accumulated during the last two or three years I mean, I cannot expect at least two 3% growth on cost.
And so we're planning a little bleed of that for the following.
Boring Warner's, we're being conservative from that perspective, having said that we'll keep on working on every item that we can match.
Yeah, Ricky I was going to say you're preaching to the choir here because in the U S. We had many of the airlines put up very very strong revenue, but miss on their cost and the stocks traded down I has given.
As reported thus far your you are the best cost story.
Your revenue was probably lighter than what we would've had and your stocks down so I'm not sure if it's cost of revenue.
I wanted to hit you on fuel or maybe a tiny can.
Can you just remind us what why is that so high that $4 40 or there is it. The next it is at the Mexican local taxes that just seems much much higher than what we're seeing from any carrier not just in North America, but around the world with what's going on there that are local.
It is aimed to airports.
So Raj on day, two planes extra cost that we get it done, but maybe sort of on point 30 additional due to the price you will get in other countries.
That's the difference that you are looking at remember remember, Michael Mexico, passing through use Jackson.
Yeah, now that makes sense, Okay, and then just lastly, I wanted colder on an ancillary you know I know the goal is to get to 50%.
Michael before you move forward I think it's really important I mean.
Guys.
When we analyze the reports from the U S. Carter's in the last couple of weeks Okay.
And then I wanted to stress again that.
Those those those those pressures that they are having from the labor perspective are not happening more of ours.
I strongly one to repeat to everybody here, a well we prepared for our growth and how well we are operating in terms of performance, Okay, and I think you guys need to understand this because.
That makes a structural difference which is tremendously important when you evaluate when our stock.
Yeah no. That's that's it that's it that's a big differentiating point no. Thanks for that Enrique and then just I just lastly.
On ancillary Hoeger I mean, you've talked about.
40%.
Aspirational wanting to get to 50%, but it was it was down per passenger.
I realize you talked about 2021 being a tough year, but you did call out lower baggage revenue and I. Just was curious is are is that the new rules going into effect and it's actually adversely impacting your ability on the baggage side or is it just less uptake like what's driving that because the fee ancillary go down per passenger.
In this type of environment.
You know it was a little surprising.
Yes, Michael So a couple of things happening there, yes clearly.
The new rules of the new interpretation of the rules from the consumer protection agency regarding carry on bag charges.
Have you had any.
I would tell you that that's one of the larger impacts. We also had some some other impacts which was.
In the second quarter of last year, we had one off effects due to coupons expiring that we gave during the pandemic.
Revenues and then.
We did have.
All main vaccination traffic in the second quarter last year and international travel typically has more ancillary revenue per passenger.
But that blended average.
Just because of a lower.
International share this quarter, we had slightly lower ancillary revenues.
When the new rules came into effect or the interpretation of the baggage rules I had heard from sort of maybe it was you guys or others, saying that the thinking was that you could offset those which you know the way that you can approach different types of bundles et cetera.
Is that still possible that you know whatever you lose from the new interpretation will you be able to offset do you think in the longer term and it just takes some time I'm sort of getting you know sort of a re induction or people sort of you know understanding the rules and the rest of the industry implementing it is that is that still the same.
Did that thinking right or am I off on that.
Yes, Michael.
Correct, we still target 50% of revenues from ancillary and we have multiple initiatives in place that just.
The time to get executed and trickle through the system.
Alright, alright, great. Thanks, everyone.
Thank you Michael.
Okay.
Our next and final question will come from Alejandro <unk> with Credit Suisse. You May now go ahead.
Hi, Linda Hungrier chime in I'm Gonna to thank you for taking my questions.
<unk> of questions here.
The first one is probably a follow up on <unk> question regarding LCI for Luka.
The question is.
How does this too.
Reports have been performing versus your.
Former expectations.
No that is not the main source of growth that schools were mentioned in the presentation, but out of these two airports, which one do you think has a higher potential growth in the short term considering the palooka airports has been already improved being proof.
So.
Just to remind everybody we have two aircrafts basically Santa Lucia.
Bachelet airports two aircrafts into Luca so as you rightly point out it's a small share of our capacity right now.
Those groups are in ramp up and to look at we started on the first of July . So it's very early days, we are seeing quite.
He loads in the leisure segment that is.
Quite easily stimulated bowl.
And in <unk>, we have a mix of customers VFR routes are performing well in terms of volume and also leisure markets the big leisure markets.
It's certainly early days and we are.
We're developing those markets also the ramp up.
We will be there for the next six months I would say.
Yes, maybe.
Just to add to holders to holdovers response, we started operating Deluca July 1st and we still haven't started in Chile banks Okay.
Starting the first half I mean, we have it to the two routes that we started in.
In March 31.
The additional capacity already starts on August 15, and September 15.
So I mean.
Woods are selling a page and but we were still too early to say.
Okay got it and then the second question in terms of the capacity.
Can you provide any more details on what's behind the slight decrease.
In the expected capacity on the updated guidance I mean is this something related to the safety rating.
The recovery or perhaps.
Due to the Mexico City Airport plan to reduce this love I mean any thoughts around this might be useful. Thank you.
Yeah. So there's two main reasons number one they are some aircraft delivery delays from Airbus.
Going to impact us in the overall growth rate for the second half and number two given the higher fuel costs.
Constantly tracking.
Capacity in terms of marginal contribution and we have identified some frequency of some markets.
In the low season of September and October that we would like to cut back to.
To focus on profitability, so it's a slight reduction in our growth.
Where instead of guiding to 25%, we're now guiding to 23% to 25%.
Yes.
Great. Thank you.
Thank you.
Yes.
Excuse me. This concludes today's question and answer session.
I'd like to invite Mr. Belter thoughts on that and then a super suited with proceed with his closing remarks. Please go ahead Sir.
So.
Thank you very much to everybody and.
Thank you very much for participating I, just want to remind again everybody.
My sincere gratitude to our family of ambassador to the board of directors to you guys as investors. Our bankers. So were the source of our suppliers for their commitment and support this has driven varieties to this to this moment.
I think one of the most important things that I need to remind everybody here is that the fundamentals of this company would remain very very clear on our investment thesis for the future, it's absolutely transferred to Europe solid.
I think it is really important for you guys to consider these things for the future. Thank you very much. Thanks for your support thanks for all your calls and everything its been a nasty couple of months and we have received a lot of direct calls from everybody and we've been trying to take care of them here we are.
To serve you as you need more information, but we're always available for everybody. Thank you very much.
Yeah.
This concludes that the large conference call for today. Thank you very much for your participation and have a nice day.