Volaris Reports Fourth Quarter 2018 Results: 8.4% TRASM Increase and 7.9% Reduction of Unit Cost Excluding Fuel

Volaris* (NYSE: VLRS and BMV: VOLAR), the ultra-low-cost airline serving Mexico, the United States and Central America, today announced its financial results for the fourth quarter and full year 2018.

The following financial information, unless otherwise indicated, is presented in accordance with International Financial Reporting Standards (IFRS).

Fourth Quarter and Full Year 2018 Highlights

Total operating revenues were Ps.7,909 million and Ps.27,305 million for the fourth quarter and full year, an increase of 21.2% and 10.2% year over year, respectively.
Total ancillary revenues were Ps.2,538 million and Ps.8,817 million for the fourth quarter and full year, an increase of 42.4% and 26.0% year over year, respectively. Total ancillary revenues per passenger for the fourth quarter and full year were Ps.512 and Ps.479, increasing 21.3% and 12.5% year over year, respectively. Total ancillary revenues represent 32.1% and 32.3% of the total operating revenues for the fourth quarter and full year, respectively.
Total operating revenues per available seat mile (TRASM) were Ps.144.5 cents and Ps.130.0 cents for the fourth quarter and full year, an increase of 8.4% and decrease of 1.1% year over year, respectively.
Operating expenses per available seat mile (CASM) were Ps.138.0 cents and Ps.134.2 cents for the fourth quarter and full year, an increase of 3.8% and 1.9% year over year, respectively; with an average economic fuel cost per gallon were Ps.49.1 and Ps.44.6 for the fourth quarter and full year, an increase of 32.8% and 29.3% year over year, respectively.
Operating expenses excluding fuel, per available seat mile (CASM ex fuel) were Ps.85.3 cents and Ps.85.9 cents for the fourth quarter and full year, a decrease of 7.9% and 7.8% year over year, respectively.
Operating income was Ps.355 million and an operating loss of Ps.881 million for the fourth quarter and full year, an increase of >100% year over year, respectively. Operating margin for the fourth quarter and full year was 4.5% and (3.2%), an increase in margin of 4.2 percentage points and a decrease in margin of 3.0 percentage points year over year, respectively.
Net income was Ps.511 million (Ps.0.51 per share / US$0.26 per ADS) and a net loss of Ps.687 million (Ps.(0.68) per share / US$(0.35) per ADS), with a net margin of 6.5% and (2.5%) for the fourth quarter and full year, respectively.
At the close of the fourth quarter, the Mexican peso had depreciated 4.6% against the U.S. dollar with respect to the end of period exchange rate of the previous quarter (Ps.18.81 per US dollar). The Company booked a foreign exchange gain of Ps.384 million as a consequence of our U.S. dollar net monetary asset position.
The net cash flow provided by operating activities were Ps.102 million and Ps.566 million for the fourth quarter and full year, respectively. Year over year the cash and cash equivalents for the fourth quarter and full year decrease Ps.218 million and Ps.1,088 million, respectively; despite the net foreign exchange differences represent an increase of Ps.277 million and decrease of Ps.29 million for the fourth quarter and full year, respectively. As of December 31, 2018, unrestricted cash and cash equivalents were Ps.5,863 million.

Resilient Macroeconomics and Domestic Consumer Demand with Exchange Rate Depreciation and Fuel Price Pressures

Resilient macroeconomics and domestic consumer demand: The macroeconomic indicators in Mexico during full year are stable, with same store sales1 increasing 5.0% year over year; remittances2 increasing in fourth quarter and full year 9.4% and 10.5% year over year, respectively; and the Mexican Consumer Confidence Balance Indicator (BCC)3 increasing in the fourth quarter and full year 18% and 12% year over year, respectively.
Air traffic volume increase: The Mexican DGAC reported overall passenger volume growth for Mexican carriers of 10.6% year over year for the fourth quarter; domestic overall passenger volume increased 10.6%, while international overall passenger volume increased 3.8%.
Exchange rate volatility: The Mexican peso depreciated 4.7% year over year against the US dollar, from an average exchange rate of Ps.18.93 pesos per US dollar in the fourth quarter 2017 to Ps.19.83 pesos per US dollar during the fourth quarter 2018. At the close of the fourth quarter, the Mexican peso had depreciated 4.6% with respect to the end of period exchange rate of the previous quarter (Ps.18.81 per US dollar). The Company booked a foreign exchange gain of Ps.384 million, mainly as a consequence of our US dollar net monetary asset position.
Higher fuel prices: The average economic fuel cost per gallon increased 32.8% and 29.3% year over year to Ps.49.1 per gallon (US$2.5) and Ps.44.6 per gallon (US$2.3) in the fourth quarter and full year, respectively.

Passenger Traffic Stimulation, Further Ancillary Revenue Expansion, and Positive TRASM Trend Reaching Almost the Same Level Last Year

Passenger traffic stimulation: Volaris booked 5.0 million passengers in the fourth quarter 2018 and 18.4 million passengers in full year 2018, up 17.4% and 12.0% year over year. Volaris traffic (measured in terms of revenue passenger miles, or RPMs) increased 17.1% and 11.5% for the same period, respectively. System load factor during the quarter and full year increased 3.9 percentage points and 0.1 percentage points to 86.5% and 84.5% year over year, respectively.
Positive TRASM trend almost at the same level of last year: For the fourth quarter and full year 2018, TRASM increased 8.4% and decreased 1.1% year over year, respectively. During the fourth quarter and full year 2018, the total capacity, in terms of ASMs, increased 11.8% and 11.4% year over year, respectively.
Total ancillary revenue growth: For the fourth quarter and full year 2018, total ancillary revenues increased 42.4% and 26.0% year over year, respectively. Total ancillary revenues per passenger for the fourth quarter of 2018 and full year increased 21.3% and 12.5% year over year, respectively. The total ancillary revenue generation continues to grow with new and matured products, appealing to customers' needs, representing 33.8% in our full year figures of the total operating revenues.
New routes: In the fourth quarter 2018, Volaris began operations in 16 new domestic routes from its focus cities Mexico City, Bajio, Guadalajara and Tijuana and four new international routes (Guadalajara, Jalisco to Charlotte, North Carolina; Bajio to Sacramento, California and Bajio to San Jose, California; and Guadalajara, Jalisco to Albuquerque, New Mexico). Additionally, Volaris launched one domestic route (Ciudad Juarez, Chihuahua to Culiacan, Sinaloa).

Despite Fuel Price Pressure and Exchange Rate Depreciation, Offset Mainly by Cost Control Discipline

CASM and CASM ex fuel for the fourth quarter 2018 were Ps.138.0 (US$7.0 cents) and Ps.85.3 cents (US$4.3 cents), respectively. This represented an increase of 3.8% and a decrease of 7.9%, respectively; mainly driven by higher average economic fuel cost per gallon of 32.8% and an average exchange rate depreciation of 4.7%, which were offset mainly by a tightening cost control discipline.

Young and Fuel-efficient Fleet

During the fourth quarter 2018, the Company incorporated four aircraft (three A320 neo and one A321 neo) to its fleet; during this quarter no redeliveries were registered. As of December 31, 2018, Volaris' fleet was composed of 77 aircraft (8 A319s, 55 A320s and 14 A321s), with an average age of 4.6 years. At the end of the fourth quarter 2018, Volaris' fleet had an average of 185 seats, 73% of which were in sharklet-equipped aircraft.

Solid Balance Sheet and Good Liquidity

During the fourth quarter and full year 2018, cash flow provided by operating activities were Ps.102 million and Ps.566 million, respectively; cash flow used in investing activities were Ps.748 million and Ps.1,389 million, respectively; cash flow provided by (used in) financing activities were Ps.151 million and (Ps.235) million, respectively; despite the net foreign exchange differences represent an increase of Ps.277 million and decrease of Ps.29 million for the fourth quarter and full year, respectively. Year over year the cash and cash equivalents for the fourth quarter and full year decrease Ps.218 million and Ps.1,088 million, respectively. As of December 31, 2018, cash and cash equivalents were Ps.5,863 million, representing 21.5% of last twelve months operating revenues. Volaris registered negative net debt (or a positive net cash position) of Ps.2,340 million and total equity of Ps.9,182 million.

Active in Risk Management

Volaris remains active in its fuel risk management program. Volaris used call options to hedge 46% of its fourth quarter 2018 fuel consumption, at an average strike price of US $1.85 per gallon, which combined with the 54% unhedged consumption, resulted in a blended average economic fuel cost of US$2.5 per gallon.

IFRS 15: Revenue from Contracts with Customers

During 1Q 2018, we adopted IFRS 15 "Revenue from Contracts with Customers" which replaces existing revenue recognition guidance, including IAS 18 "Revenue". IFRS 15 establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers.
The adoption of the IFRS 15 impacted the classification and timing of recognition of certain ancillary items such as bags, advanced seat selection, itinerary changes and other air travel-related fees, since they are deemed part of the single performance obligation of providing passenger transportation. These ancillary items are now recognized in passenger revenue (disclosed in the consolidated statement of operations including in these quarterly earnings release as "other passenger revenue").
Non-passenger revenue primarily consists of revenue from the sale of other items such as rental cars, insurance, hotels and cargo. This change did not have a material impact on our income statement or balance sheet in any period presented.
This quarterly earnings release includes supplemental information for comparable basis, with recast amounts with the IFRS 15 adoption effects, and were derived from unaudited financial statements included in the quarterly reports on Form 6-K during the year ended December 31, 2017.

IFRS 16: Leases

IFRS 16 was issued in January 2016 and it replaces IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases-Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single on-balance sheet accounting model similar to the accounting for finance leases under IAS 17. The standard includes two recognition exemptions for lessees – leases of 'low-value' assets (i.e., personal computers) and short-term leases (leases with a lease term of 12 months or less). At the commencement date of a lease, a lessee recognizes a liability to make lease payments (the lease liability) and an asset representing the right to use the underlying asset during the lease term (the right-of-use asset). Lessees are required to separately recognize the interest expense on the lease liability and the depreciation expense on the right-of-use asset.
Lessees are also required to remeasure the lease liability upon the occurrence of certain events (i.e., a change in the lease term, a change in future lease payments resulting from a change in an index or rate used to determine those payments). The lessee will generally recognize the amount of the remeasurement of the lease liability as an adjustment to the right-of-use asset. In addition, for leases denominated in a foreign currency other than lessee's functional currency the Lease liability will be remeasured with a charge directly to income or expense in the current period.
IFRS 16 permits two different adoption models. Full retrospective model or modified retrospective model.
Cash Flows impact. Under IAS 17 cash flows related to rent payments were recorded as part of the operating cash flows, but under IFRS 16 the cash flows related to rental payments must be presented as part of the financial cash flows.
Income tax accounting. Under IFRS 16, based in the impacts and differences between the right of use asset and the lease liability, will be necessary: a) Recognition and measurement of deferred tax assets and liabilities; and b) Assessment of the recoverability of deferred tax assets.
Lessor accounting under IFRS 16 is substantially unchanged from accounting under IAS 17. Lessors continue to classify all leases using the same classification principle as in IAS 17 and distinguish between two types of leases: operating and finance leases.
IFRS 16, which is effective for annual periods beginning on or after 1 January 2019, requires lessees and lessors to make more extensive disclosures than under IAS 17.

Transition to IFRS 16

The Company adopted IFRS 16 as of January 1st, 2019, using the full retrospective method. The cumulative effect of adopting IFRS 16 has been recognized as an adjustment to the opening balance as an increase in assets and liabilities and an adjustment in the retained earnings. The full disclosure of this initial adoption will be included in the Company´s 2018 annual report.