Q1 2024 Controladora Vuela Compañía de Aviación SAB de CV Earnings Call
Operator: Good morning everyone. Thank you for standing by. Welcome to the Volaris First Quarter 2024 Financial Results Conference Call. All lines are in a listen-only mode.
Operator: Following the company's presentation, we will open the call for your questions. Please note that we are recording this event. This event is also being broadcast via live webcast and can be accessed through the Volaris website. At this point, I would like to turn the call over to Ricardo Martnez, Investor Relations Director. Please go ahead, Ricardo.
Ricardo Martnez: Good morning, and thank you for joining the call. With us is our president and CEO, Enrique Beltranena; our airline executive vice president, Holger Blankenstein; and our Chief Financial Officer, Jaime Post.
Ricardo Martnez: They will be discussing the company's first quarter 2024 results. Afterward, we will move on to your questions. Please note that this call is for investors and analysts only. Before we begin, please remember 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 results to differ materially from expectations, as described in the company's filings with the United States FEC and the Mexico CMVB.
Ricardo Martnez: These statements speak only as of the day they are made, and Volaris undertakes no obligation to update or modify any forward-looking statement. As in our earnings per release, our numbers are in U.S. dollars compared to the first quarter of 2023, unless otherwise noted. And with that, I will turn the call over to Andrew.
Andrew: Good morning everyone, and thank you for joining us today. I am proud to start by saying our Volaris team delivered strong first-quarter results. It was certainly a challenging quarter as we ramped up the engine-accelerated inspection processes that drove challenges in delivering a good schedule, but I am proud that the team was able to execute on our plans so well. Over the last six months, our primary focus has been directing operations to enhance our customer service, managing ongoing changes to the schedule as the fleet plan changes, and continuing our emphasis on obsessive cost control.
Andrew: Despite the ongoing challenges with engine and aircraft issues, we continue to execute well and remain focused on delivering shareholder value. During the first quarter, we undertook preventive acceleration inspections resulting in the grounding of approximately 60 engines, for which we received pre-arranged compensation from Pratt & Whitney. We'll continue to look for ways to mitigate the impact of these engine removals, and we'll continue to work closely with Pratt to accelerate the required work on the new engine. However, despite Pratt & Whitney's optimistic discourse on enhancing MRO capacity and availability of materials and spare parts, Volaris remains skeptical about tangible progress in this area.
Andrew: While engine removals to date have gone according to schedule, and aircraft on ground during the quarter were consistent with the plan, we are being conservative in our expectations for when engines will return to service. Even with all this complexity, we have been able to drive strong results. Through nimble planning, a flexible network, and our ability to make rapid strategic adjustments, we generated a strong increase in tierism and ancillaries while costs remained controlled.
Andrew: As a result, we achieved net profitability in the first quarter, posting a $33 million net income. This marks a significant achievement, as historically, due to seasonality, our first quarter has resulted in net losses. The last time we recorded a net profit in the first quarter was back in 2019.
Andrew: As we execute our strategy, we continue to prioritize profitability when allocating capacity. On last quarter's call, we outlined three core pillars for navigating the current environment. One, protecting our fleet and capacity. 2.
Andrew: Optimizing our Network and Driving Profitability, and 3. Elevating the Passenger Experience and Cultivating Talent for our Future Growth. Olaris continues to deliver against each of these pillars, and our strategy has proven effective and is bearing fruit. Now, let's review how we close the core.
Andrew: Total Operating Revenue Group 5, with unit revenue rising 21. Our ASMs contracted 13- due to engine accelerated inspections, which was better than our prior guidance of 16 to 18. This improvement over guidance is mainly driven by the timing of aircraft delivery. EBIT and EBITDA margins were 14% and 31%, respectively, expanding by 18% and 14% touch points as compared to the prior year, respectively, and ahead of our expectations. As capacity returns to our fleet, we are committed to being prudent and rational with our growth.
Andrew: Again, prioritizing profitability. Based on current planning for engine shop visits, we expect to fully recover 2023 capacity levels by the end of 2023. In the first quarter, we received two new A321neos from Airbus ahead of schedule, both of which have engines with full life engine discs.
Holger Blankenstein: The timing of this additional capacity enabled us to incrementally capture robust demand during Mexico's holy week and year. With the rationalization of Mexican capacity and the restoration of FAA Category 1 status, we have implemented a completely new base schedule that delivers a more consistent and reliable 18-year service. The changes to the network were necessary given that we had to reduce operations at Mexico City International Airport to 43 slots per hour and we needed to develop better recovery in the schedule given ongoing engine challenges.
Holger Blankenstein: Additionally, we reallocated significant capacity from the Mexican domestic market to U.S.-Mexico routes while preserving our position in the core domestic market. This strategy shift enables us to prioritize routes that should have stronger unit revenues while managing a network with reduced ASMs and no growth. In addition, we're working to reactivate and grow our culture with Frontier, which will drive incremental market opportunities, but we don't expect to see any impact until later. Overall, we are pleased with our business performance at these capacity levels despite increased unit costs due to reduced ASD.
Holger Blankenstein: Our team will remain focused on executing our operational plans. We will continue to focus on managing capacity, driving unit revenues, delivering margin expansion, strict cost control, being conservative with debt, and achieving results that are in line with our. For years, we have been discussing building an airline with cost-effectiveness. The ability to execute as planned and the flexibility to adjust as needed. Today, Volaris is delivering results, and we are confident we can continue to do so in a consistent manner. With that, I'll now turn the call over to Holger to discuss the quarter's commercial trends and operating performance.
Holger Blankenstein: Thank you and good morning. In the first quarter, Volaris experienced robust demand, especially in the domestic market, with March showing significant outperformance. Although we expected some traffic shifts from the second quarter, given that Easter occurred in the final week of March, we are also happy with last-minute booking. Our capacity reduction was less than expected, at around minus 13% instead of the guided minus 16 to minus 18%. This was because Airbus delivered two new AC-21neos earlier than planned.
Holger Blankenstein: Additionally, high aircraft utilization also boosted ASMs per departure for the quarter. This additional capacity enabled us to meet demand and dilute fixed costs. Regarding network breakdown, ASMs were 27% lower in the domestic market, and we increased capacity by 17% in the international market, resulting in a network-wide ASM decline of minus 13%. Taking advantage of the restoration of FAA Category 1, we continue to reallocate capacity to northbound routes, which are undergoing a maturity process in preparation for the peak summer season, while simultaneously rightsizing our domestic core market.
Holger Blankenstein: Therefore, the international load factor dropped four points to 82%, and the Domestic Markets Load Factor was strong at 91%, up 6 points over the prior year period for a healthy load factor result of 87% for the overall net. However, we will be cautious and will not introduce too much capacity to any individual route. While the earlier-than-expected arrival of the two AC-21NEOs provides incremental ASMs for the full year, we still expect a capacity reduction of 16 to 18 percent for 2024. And we are trending towards the upper end of that range, so we are closer to a minus 16 percent change versus 2021.
Holger Blankenstein: Meanwhile, we continue to redeploy significant capacity into the US market, and we expect it will constitute around 45% of our network this year compared to roughly 30% historically. We are currently in the ramp-up phase of much of this additional capacity, but we continue to see progress in attractive markets like Los Angeles, the Bay Area, Chicago, and Texas. In Central America, we are reducing the number of aircraft allocated to the market from 9 to 6 due to our lack of aircraft availability.
Holger Blankenstein: Traveling improved to $0.0934, up 21%. This result was primarily driven by a focus on serving the most profitable routes in the domestic market, reducing capacity in underperforming routes, and by robust growth in ancillary. International traffic remains solid despite a 17% capacity increase. As customers increasingly embrace the Volaris Ultra low-cost model, they are more frequently purchasing an ancillary service; total ancillaries per pax rose to a historically high record of $57 from the previous record of $55 for the fourth quarter of 2023.
Holger Blankenstein: In the first quarter, ancillary revenues represented 51% of total operating revenues, in line with our goal of having them represent half of total operating revenue. These ancillary purchasing patterns are promising, as we simultaneously see strong base fare trends. Our average base fare stood at $54, reflecting a 15% increase.
Holger Blankenstein: On recurring revenue, our goal is to build V-Club membership to compose about a third of our total sales in the medium term. Additionally, in the near term, we expect to promote greater affinity with our core customers as we refine the Volaris mobile app and other digital assets, which will catalyze higher direct sales, better product customization, booking flexibility, and more options for our customers. Passenger satisfaction is crucial to our success. Bolaris achieved a net promoter score of 32% in the first quarter.
Holger Blankenstein: A positive result despite recent engine-related route reductions and cancellations. Our customer service team is working hard to communicate with passengers and reschedule bookings while our operations team is performing well under the circumstances. On-time performance for the quarter was 82.8% with a scheduled completion of 99.3% and utilization of 5.2 segments per aircraft per day.
Holger Blankenstein: I want to reiterate our focus on good labor relations. We successfully agreed the 2024 Union Agreement, a key enabler of widening our cost advantage versus North American ULTCs and legacy US airlines. Maintaining strong labor relations and a stable workforce, even during periods of industry disruption, is essential to our operations and financial strategy and positioning our business for long-term growth. Looking ahead, we have noted reduced demand for April as Easter was celebrated in the first quarter.
Holger Blankenstein: That said, we are observing healthy spring and summer booking trends, and we are closely monitoring pricing and load factors to optimize yield. Our forecast indicates a further increase in second quarter bookings, as we enter the peak season. It is important to note that while we are experiencing strong demand and positive travel trends, particularly in the domestic market, we are also navigating the challenges caused by the accelerated engine inspection process while managing our capacity.
Holger Blankenstein: In summary, we are well positioned for a positive 2024 driven by cost discipline, improved traffic through better fares, strong ancillary performance, increased loads, and our robust network. This upward trajectory, which started in the fourth quarter of 2023, is already evident. Booking trends indicate continued favorable performance in the months ahead, aligning with our 2024 guidance. I will now turn the call over to Jaime to discuss our financial...
Jaime Esteban Pous Fernandez: Positive trust on trends and strict cost control define our first quarter 2024 financial results. When combined with solid traffic, pattern-witness compensation, and diligent execution, we generated net profitability in the quarter. This is a notable accomplishment for the first quarter.
Jaime Esteban Pous Fernandez: And historically, first quarters, due to seasonality, have resulted in a loss. These first quarter results encourage us to revise upward our full year 2024 guidance. However, our execution plan for the year remains aligned with our initial outlook. I will provide a more detailed discussion of our updated guidance for... Let me start by walking through our performance in the first quarter of 2024 compared to the same period last year. Total operating revenues were $768 million, a 5% increase, notwithstanding the 13% year-over-year reduction in capacity due to the strong demand and total revenue per pax improvement.
Jaime Esteban Pous Fernandez: Gasomix fuel resulted in better than Guidance at 5.16 cents, an increase of 11% against the first quarter of last year. The improvement was driven by the remeasurement of previously booked redelivery accruals, which reflect nine lease extensions for aircraft due for redelivery in 2025 and 2026. Nonetheless, as discussed in our previous call, there was substantial cost pressure from the engine-related AOEs and the effect of a larger proportion of international capacity, particularly with higher landing and navigation fees in the United States.
Jaime Esteban Pous Fernandez: We booked sail and lease gains of $9.7 million in the other operating income line, and the remeasurement related to lease extensions generated a $41 million benefit in the aircraft viable lease expenses line. Meanwhile, total cost was relatively flat year-over-year at 8.08 cents due to lower fuel expenses in the period. Our average economic fuel cost fell by 13% to $3.01 per gallon.
Jaime Esteban Pous Fernandez: EBIT totaled $104 million, compared to a $31 million loss in the first quarter of 2023. This reflected a stronger threshold, the benefit from aircraft lease extensions, and lower fuel costs, resulting in a margin of 14% and an 18% touchpoint increase. EVTAR total $235 million, a 91% increase, while the EVTAR margin was 31%, an improvement of 13 percentage points. It is important to note that both EVIT and EVITAR include tax compensation as well as expense from leases of the entire fleet, including aircraft on the ground.
Jaime Esteban Pous Fernandez: Net income rose year over year to $33 million, translating into earnings per ADS of $0.29. The cash flow provided by operating activities in the first quarter was $245 million. The cash outflows used in investing and financing activities were $97 million and $171 million, respectively.
Jaime Esteban Pous Fernandez: In the first quarter, our CAPEX, excluding fleet pre-delivery payments, totaled $83 million, primarily driven by acquiring additional spare engines. These investments are crucial for maintaining business continuity and minimizing disruption to our cooperation. As a result, we now expect capital expenditures to be $400 million for the full year 2024 versus an original CAPEX forecast of 300 million. Bolaris ended the quarter with a total liquidity position of $768 million, representing 23% of the last 12 months' total operating revenue. Our net debt to EBITDA ratio decreased to 3.1 times from 3.8 times at the end of the first quarter of 2023 and 3.3 times at year end of 2023 We expect to further increase the leverage by the end of the year. Volaris has low and manageable refinancing exposures in the short to medium term.
Jaime Esteban Pous Fernandez: Most of our financial debts, short-term maturities, are associated with pre-delivery payments, thus not posing a refinancing risk, given that we have already signed signal leasebacks for the aircraft that will be delivered over the next 18 months. We continue to be conservative with our balance sheet. As of March 31st, our fleet consisted of 134 aircraft, up from 129 aircraft at the end of the year; seats per departure were 197, and our fleet had an average age of 5.9 years.
Jaime Esteban Pous Fernandez: We confirm our medium-term aircraft delivery schedule with Airbus and expect 21 additional aircraft deliveries by the end of 2025, all with PDP financing and St. Louis VAC commitments. Turning now to guidance, we are pleased with our first quarter results, and market trends continue to be encouraging. However, industry conditions remain fluid.
Jaime Esteban Pous Fernandez: While we acknowledge macroeconomic and geopolitical uncertainties, we are cautiously optimistic about the year. For the second quarter of 2024, we expect an ASM reduction of approximately 18% year-over-year. Thrust of 9.1 to 9.2 cents, and customized fuel to be in the range of 5.5 to 5.6 cents. Please note that the primary cause of the cast and mix fuel increase is the capacity reduction and the specific fixed costs linked to the grounded fleet, which are not fully compensated by pattern width.
Jaime Esteban Pous Fernandez: Finally, we expect an EBITDA margin between 31% and 33%. For the full year 2024, our latest guidance is as follows. We continue to expect an ASM reduction of 16 to 18% year over year and an e-return margin in the range of 32% to 34% compared to our initial outlook of 31% to 33% given enhanced profitability in the first quarter. CAPEX Net-to-Finance Fleet Delivery Payments of $400 million, driven by our purchases of spare engines.
Jaime Esteban Pous Fernandez: Our second quarter and full year 2024 outlook assumes an average exchange rate of 17.3 to 17.5 Mexican pesos per US dollar and an average U.S. Gulf Coast jet fuel price of 2.6 to 2.7 dollars per gallon. We will continue to make decisions appropriate to increase profitability, preserve business continuity, and create shareholder value. Now, I will turn the call back to Enrique for closing remarks.
Enrique Javier Beltranena Mejicano: Thank you, Jaime. And soon, we will continue to execute and deliver on every facet of our plan as we move through 2024. We will remain flexible, adjusting for volatility and capitalizing on opportunities as necessary to drive profitability. Before proceeding to the Q&A session, I'd like to highlight the upcoming significant political campaign in Mexico over the next few months. While we anticipate minimal changes to aviation policies, the primary uncertainty revolves around the development of aviation policies for managing metropolitan areas. Thank you very much for listening. Operator, please open the line for questions.
Operator: Certainly. Thank you.
Operator: The floor is now open for questions. If you have a question, please dial star 11 on your telephone at this time or any time. If at any point your question is answered, you may remove yourself from the queue by pressing the pound key. Questions will be taken in the order they are received. We ask that when you post your question, you pick up your handset to provide optimum sound quality. Similarly, those following the presentation via the webcast may post their questions on the platform.
Operator: The management team will answer them during the call, or the Valeris Investor Relations team will follow up after the conference call is finished. To send your questions via the webcast platform, click on the Ask a Question button and type your inquiry. Please hold while we poll for questions. And our first question will come from Duane Pfennigwerth, of Evercore ISI. Your line is open.
Duane Pfennigwerth: Hi. Thank you. Good morning.
Unknown Executive: Um, on GTF, I wonder, have you gotten any engines back yet? And how did those turn times compare with your expectations? Are you seeing parts being prioritized for grounded aircraft versus new deliveries? versus new deliveries. And, you know, can you just elaborate on spare engine availability? Was this availability that came up as a function of your negotiations and hence, you know, hence the higher capex?
Unknown Executive: Yes, Duane. Good morning.
Unknown Executive: So, we continue seeing progress, and as RTX reported this morning, they're probably in the highest peak of engines in terms of maintenance because, obviously, the bulletin was issued in January, and basically, all these engines are removed now and in the process of being repaired. The issue here is how fast they are inducting the engines into shock, A and B. Once they are in the shop, are they really being inducted, or do they stay on the patio waiting for spare parts and material?
Unknown Executive: And the reason we're skeptical, A, about the turnaround times, and B, about the speed that they can process this, is that we have not seen, A, the inductions at the level they have promised, and B, that they really start working on the engines once they have them in the shops, OK? We have not received any powder metal engine back from the shops. I mean, we have received other engines that were repaired for other reasons. There, the turnaround time was about 310 days. And I think that's it; that's all you asked.
Unknown Executive: Sorry, yeah, sorry for the multi-part question there, but I guess when would you expect the engines that went in for this specific issue? You know, is it basically a year from January? So early 2025? When will you begin to kind of measure that turn time? Or is it sooner?
Unknown Executive: I think we're talking now more or less about 350 days or a little bit more. We delivered the first nine engines before September 15, so we think it's going to be somewhere in the fourth quarter of this year.
Operator: Okay, okay, great. And then, just maybe, an easier one.
Holger Blankenstein: How should we be thinking about the Easter shift? Impact. I know that can be more of an elongated peak leisure demand period in Mexico. So how do you think about the Easter shift impact on the March quarter and the June quarter?
Holger Blankenstein: Yeah, this is Holger, Duane. Good morning. Well, clearly, the Easter shift helped the first quarter. We saw a great surge versus other quarters in previous years. There was one week of the Easter high season that fell into the March quarter and one into the June quarter. So we are going to see good results partially in April for Trasm, and then the June quarter will have some effect, and we are currently guiding to 9.2 cents for the June quarter in terms of Trasm.
Operator: Okay, thank you very much.
Operator: And one moment for our next question. Our next question will be coming from Stephen Trent of Citi. Stephen, your line is open. Good morning.
Stephen Trent: Good morning, everyone. And thanks very much for taking my question. Can you hear me okay, by the way?
Unknown Executive: Yes, we can hear you perfectly.
Holger Blankenstein: Just a question about, you know, how very strong you guys have been on the unit revenue side. You know, I've gotten client inbound calls, looking at you guys and wondering why some of your competitors are floundering in Latin America. Is it fair to say that, one, some of those competitors are more focused on beach destinations, and you're not? And two, you guys are generating a lot more revenue, you know, outside of the basic economy versus some of your competitors. I just wanted to make sure I'm thinking about that fairly and sorry about my phone.
Holger Blankenstein: Well, clearly, a couple of things. This is Holger, by the way. Stephen, good morning.
Holger Blankenstein: A couple of things explain the travel increase in the first quarter. First and foremost, obviously, we had a significant decrease in capacity across the entire domestic market because of the Pratt & Whitney groundings. And also, you might recall that Aeromexico had some issues with the Boeing 737 MAX in January, which led to a capacity shrinkage in the domestic market, and that clearly helped. We trimmed our network, focusing on the least profitable markets, and that helped push unit revenue.
Holger Blankenstein: Second, I would characterize the market as quite rational, both in capacity and pricing and the domestic market and also in our international routes, and we've been working very diligently on generating or taking advantage of this capacity reduction and generating good loads, good fares, and good ancillaries. The shift toward the international market and the capacity expansion we did in the international market clearly helped our ancillary revenue performance and unit revenue. And then, as we have discussed, Stephen, the fourth element here is clearly the peak holy season Easter, Easter Week, which occurred in the first quarter, which is not typical that it falls into the first quarter. So I think all these factors combined led to our strong transit performance in the first quarter.
Holger Blankenstein: I appreciate that Holger. And just a very quick follow up. I believe you guys mentioned $57 per passenger and ancillary revenue. You know, broadly thinking, as we look down the line a year or two from now, could we conceivably see some upside on that number, assuming FX neutrality between now and then?
Holger Blankenstein: Yes, clearly, we are continuously executing our ancillary strategy. We believe that there is upside driven also by a shift to international markets and the higher ancillary for passengers that international passengers buy. But we're also executing on other things, new products, better pricing, better personalization, more recurring revenue streams. So, yes, we believe there's upside in ancillary for passengers.
Operator: Okay, super. Thanks, Holger. Thanks, guys.
Operator: In one moment for our next question, and our next question will be coming from Michael Linenberg of Deutsche Bank. Your line is open, Michael.
Michael John Linenberg: Oh yeah, hey, good morning everyone. Just a quick question here. Jaime, you may have said the number. What is the number of aircraft that are now grounded due to the GTF issue, and where does that number peak out for the year?
Jaime Esteban Pous Fernandez: Hi Michael. This is Jaime.
Jaime Esteban Pous Fernandez: Hi Michael, this is Jaime. The average number of aircraft that we had grounded during the first quarter was 29, Michael. I think the peak will be the peak of the third queue and the beginning of the third queue for this year. How much will it be? How much do you want me to say thank you?
Jaime Esteban Pous Fernandez: The peak is going to be on the third queue, on the fourth queue, Michael. I think you should see this because there are engines coming up and coming down. Think about reducing ASMs instead of aircraft on the ground. We will be provided with the average planes at the end of each quarter. But consider that guidance of reducing 16 to 18 percent capacity. The flight forward of the engines that we expect to be OEG during the year.
Jaime Esteban Pous Fernandez: My second question is, when we look at the operating gain that you or the other operating expense or credit that you took in the quarter, how many airplanes or engines are underlying that? And this is more of a modeling question. How does that number look as we move through the year? Is that the high point? It seems like that would be the high point. And that wouldn't that number come down dramatically based on your deliveries for the year. Is that right?
Jaime Esteban Pous Fernandez: I'm going to talk about two lines. Michael, first on the other operating income line. Remember, what we are including in that line is St. Louis leaseback gains. This quarter reflects the St. Louis leaseback gains of 321 NILs and also plat compensation. When you move to viable lease expenses, which are basically re-deliveries, there's where we have a one-time effect that for the re-deliveries, extensions of the 2025 aircraft and one 2026 line aircraft, that is going to come back to the normal number of that. We also had that benefit in the free queue. But going forward, since we are not expecting to make decisions on extending any more aircraft, it should be stabilized to historically number smart, Michael. Okay.
Enrique Javier Beltranena Mejicano: Michael, if I may, I think it's important, I mean, to give some color to this whole thing about Pratt. I mean, the first thing is, this is a quarter that I think is spectacular in terms of tierism because Pratt doesn't compensate its employees anything on revenues.
Enrique Javier Beltranena Mejicano: Okay. So I think that's really important to be considered. Okay. And very, very, very driven by market capacity and the way we are managing our tierism factors. Okay. The second point, which is really important, is that, despite doing really well on the revenue, on the chasm, things are going to get more and more complicated exactly because of what you're asking.
Enrique Javier Beltranena Mejicano: Okay. Towards the third quarter, we have the largest number of engines in repair. Okay. So it is important that I don't want you guys to get too bullish with the results of the first quarter because we remain skeptical about what is coming in terms of engines during the next couple of quarters.
Operator: Now that's very helpful.
Operator: In one moment, question. And our next question will be coming from Rogerio Arajo of Bank of America. Your line is open.
Rogrio Arajo: Yeah, hi, guys. Thanks very much for the opportunity. Congratulations on the strong results. A couple here on my side.
Jaime Esteban Pous Fernandez: First, is there any way we can think about the net impact of the engine recall? So what I mean is, if we take into consideration the compensation this quarter, but also these economies of scale that Volaris is facing, and they hired TRAS to see if the lower flight frequencies are giving you is this positive or negative to EBITDA and margins in a review, and anything you can any caller can give on that would be extremely helpful. The idea here is to think how recurring these stronger margins will be for the coming years. Thank you.
Jaime Esteban Pous Fernandez: Hi Rogerio, this is Jaime. I would say that you should think that this quarter was really all about traffic. Pratt compensation doesn't compensate for revenue loss. We have 29 aircraft on the ground, and we were able to fully compensate for the revenue loss of those aircraft on our own and through our work and network and all the strategies that Enrique and Holger have been talking about since the last quarter. The only thing that is helping is cash flow because basically, I'm getting compensated for the rents of the fleet that is grounded, but I'm not getting fully compensated for all of the direct costs from the grounded fleet. So I think, in general, the situation is negative for the entire business, and basically, we have a plan in order to mitigate the consequences.
Enrique Javier Beltranena Mejicano: I think if I want to add some color to that, I think the TRASM improvement will continue as long as everybody continues to be careful with the capacity that they inject into the market, especially once the capacity is starting to come back. We in Bolares are absolutely careful and very, very detailed in the way we will reassume the capacity into the market, and we don't want to create a problem, A, on capacity or B, on pricing.
Operator: Okay, this is very clear and helpful. Thank you.
Rogrio Arajo: Another very quick question here is on this extension of aircraft lease contracts. This has been supporting the variable lease expenses line in the past couple of quarters. Should we expect further positive impacts in the upcoming quarters, or is that it? Thank you.
Jaime Esteban Pous Fernandez: You should not expect that, Roger.
Operator: Okay, perfect. Thank you very much.
Operator: And one moment for our next question, and our next question will be coming from Helene Becker of T.D. Cohen.
Operator: Your line is open. Again, Helene Becker of TD Cohen, your line is open. And I'm moving forward to the next question, and our next question will be from Guilherme Mendes of J.P. Morgan.
Guilherme G. Mendes: Good morning, good afternoon everyone, and Enrique, Holger, Jaime, Ricardo, question I have a follow-up question on the competitive learner. Can you speak of it? We can barely hear you, yeah, go ahead. Okay. Sorry, can you hear me better now? Yes. Sorry about that.
Holger Blankenstein: My question is on Higgins' point about competitors setting capacity in a conservative way. How overall have you been seeing the competitive environment in Mexico? Viva will start to ground more capacity more towards the second half of the year, so do you see some kind of pressure at some point in time or the base cages for all the competitors to continue to be irrational? Thank you.
Holger Blankenstein: As I mentioned earlier, this is Holger. Good morning. We are currently seeing a pretty rational environment in the domestic market with rational capacity allocation into the key markets, a reduction of capacity in Mexico City International Airport due to the slot situation, and a good pricing environment. We are also adding more capacity and shifting capacities from the domestic market to the international market capacity ramp-up, which should ramp up fully towards the high season of June and July. And we are cautiously optimistic about that capacity getting to its full potential this year. As you might recall, we shifted 17% of the capacity to US markets in the first quarter.
Operator: I'm detecting no audio. Moving forward. Our next question will be coming again, so please follow up from Helane Becker, T.D. Cohen, your line is open.
Operator: Hi, thanks very much, operator. Can you hear me now?
Helane Becker: Yes, we can, Helene. Good morning. Oh, good morning. Sorry.
Helane Becker: I mean, I know you took two in the quarter that just ended, but have you been, have they talked? Has Airbus talked to you about when the next set of aircraft will come in?
Jaime Esteban Pous Fernandez: Hi Elaine, this is Jaime. We still have from the Airbus purchase order a total of 10 additional aircraft to be delivered during 2024. So far, we expect that the aircraft are going to be delivered within a month in advance or a month in delay, according to what Airbus is telling us. And that's included in the ASM guidance for the year that we have. It includes what we expect to be coming out because of the engines and new aircraft mitigation plan extensions, and they also came in the ASM capacity guidance of 16 to 18% reduction during the year Elaine.
Operator: Okay, that's very helpful. Thank you.
Helane Becker: And then just on the cash balances, I think 23% of LTM revenue. I want to say, I thought I read somewhere that it was as high as 30% plus. Where is your goal for that? Like, I think in the past, it was as high as 30% plus. Where is your, like, sweet spot for that?
Jaime Esteban Pous Fernandez: Our goal, Elaine, is to maintain it within 25 and 30, right now, because of what happened in particular on the circuit last year and the AOGs, with some impact from last year, but ideally, our goal and our budget is to maintain it between 25 and 30. Okay.
Operator: Okay, thank you very much, and sorry about the question. Thank you.
Operator: And one moment for our next question, and our next question will be coming from Fernanda Rochia of BTG. Your line's open.
Fernanda Rochia: Hi, thank you for taking my question and congratulations on the result. Two questions on our end. The first is we heard some rumors about a possible Category 1 downgrade from FAA, so just wanted to hear your most updated view on this matter. And second, given the volatility in oil and the effect that we are seeing, just wondering how we should think about your head strategy on both things going forward. Thank you.
Jaime Esteban Pous Fernandez: Hi Fernanda, this is Jaime.
Jaime Esteban Pous Fernandez: We have not heard a rumor, and we don't have any indication that a new downgrade will take place for Mexico, so you can take that away from your mind. And, in particular, with hedging, we don't have any hedging for fuel or FX. We don't plan to do it for the first of the year. It is very important, in terms of FX, to consider that we have a natural hedge and we have an important portion of our revenue coming in U.S. dollars, plus all of our cash is 90% invested in dollars.
Operator: Perfect. Thank you very much. Have a nice day.
Operator: And excuse me, this concludes today's question and answer session. I would now like to invite Mr. Beltrane Nena to proceed with his closing remarks. Please do so.
Enrique Javier Beltranena Mejicano: Hey, I just wanted to thank you everybody for being on the call and for your very interesting questions. I think that, again, it was a quarter driven by execution.
Enrique Javier Beltranena Mejicano: And I think, again, I want to remind everybody the effort we made in the revenue line. As always, I would like to thank you, our family of ambassadors, the board of directors, you, investors, bankers, lessors, and suppliers for their commitment and support. I look forward to speaking with you all again on the next call. And I will be visiting New York, Boston, and Chicago in the next quarter, so I might see everybody there.
Operator: And this concludes the Velouris conference call for today. Thank you very much for your participation, and have a nice day.