Volaris Reports Second Quarter 2018 Results: Ancillary Revenue Expansion And 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 second quarter 2018.

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

Second Quarter 2018 Highlights

Total operating revenues reached Ps.6,230 million for the second quarter, an increase of 3.9% year over year.
Total ancillary revenues were Ps.2,093 million for the second quarter, an increase of 20.1% year over year. The total ancillary revenues per passenger for the second quarter were Ps.466, increasing 8.7% year over year.
Total operating revenues per available seat mile (TRASM) were Ps.123.1 cents for the second quarter, a decrease of 4.7% year over year.
Operating expenses per available seat mile (CASM) were Ps.134.5 cents for the second quarter, an increase of 5.0% year over year; with an average economic fuel cost per gallon of Ps.45.3, increasing 41.2% year over year, and an average exchange rate of Ps.19.37, a year over year increase of 4.2%. Operating expenses per available seat mile excluding fuel (CASM ex fuel) were Ps. 86.2 cents for the second quarter, a decrease of 5.9% year over year.
Operating loss was Ps.575 million for the second quarter, with an operating margin of (9.2%), equal to a year over year operating margin decrease of 10.1 percentage points.
Net income was Ps.38 million (Ps.0.04 per share / US$0.02 per ADS) for the second quarter, with a net income margin of 0.6%, equal to a year over year net margin increase of 9.1 percentage points.
At the end of the second quarter, the Mexican peso depreciated 8.3% against the U.S. dollar with respect to the end of period exchange rate of the previous quarter. The Company booked a foreign exchange gain of Ps.653 million as a consequence of our U.S. dollar net monetary asset position.
Net cash flow used in operating activities was Ps.493 million, in conjunction with cash flow used in investing activities of Ps.348 million, net cash flow used in financing activities of Ps.204 million, and a positive net foreign exchange difference of Ps.499 million, the net cash decrease in the second quarter was Ps.546 million. As of June 30, 2018, cash and cash equivalents were Ps.6,771 million.

Stable 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 the second quarter were stable, with same store sales1 increasing 4.5% year over year; remittances2 increased 18.9% year over year during April and May 2018; and the Mexican General Economic Activity Indicator (IGAE) 3 increasing 1.4% year over year in April of 2018.
Air traffic volume increase: The Mexican DGAC reported overall passenger volume growth for Mexican carriers of 9.9% year over year in April and May; domestic overall passenger volume increased 9.6%, while international overall passenger volume increased 11.0%.
Exchange rate volatility: The Mexican peso depreciated 4.2% year over year against the US dollar, from an average exchange rate of Ps.18.60 pesos per US dollar in the second quarter 2017 to Ps.19.37 pesos per US dollar during the second quarter 2018. At the end of the second quarter, the Mexican peso depreciated 8.3% with respect to the end of period exchange rate of the previous quarter. The Company booked a foreign exchange gain of Ps.653 million as a consequence of our US dollar net monetary asset position.
Higher fuel prices: The average economic fuel cost per gallon increased 41.2%, year over year, to Ps.45.3 per gallon (US$2.3) in the second quarter 2018, year over year.

Passenger Traffic Stimulation and Further Ancillary Revenue Expansion, Partially Offset Challenged Fare Environment

Passenger traffic stimulation: Volaris booked 4.5 million passengers in the second quarter of 2018, up 10.5% year over year. Volaris traffic (measured in terms of fare revenue miles, or RPMs) increased 9.2% for the same period. System load factor during the quarter increased 0.1 percentage points year over year to 85.8%.
Challenged fare environment: For the second quarter of 2018, yield decreased 10.9% with TRASM decreasing 4.7%, year over year. During the second quarter, in terms of ASMs, domestic capacity grew 14.0%, while international capacity decreased 0.5%, year over year.
Total ancillary revenue growth: Total ancillary revenues and total ancillary revenues per passenger increased 20.1% and 8.7% year over year for the second quarter of 2018, respectively. The total ancillary revenues generation continues to grow with new and matured products, appealing to customers' needs, representing 34% of the total operating revenues.
New routes: In the second quarter 2018, Volaris began operations in two new international routes between: a) San Jose, Costa Rica – San Salvador, El Salvador – New York City, New York; and b) San Jose, Costa Rica - San Salvador, El Salvador – Washington, D.C.

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

CASM and CASM ex fuel for the second quarter 2018 were Ps.134.5 (US$6.9 cents) and Ps.86.2 cents (US$4.4 cents), respectively. This represented an increase of 5.0% and decrease of 5.9%, respectively; mainly driven by increase in the average economic fuel cost per gallon by 41.2%, average exchange rate depreciation of 4.2% and tightening cost control discipline.

Young and Fuel-efficient Fleet

During the second quarter 2018, the Company incorporated three aircraft (two A321 neo and one A320 neo) to its fleet and three aircraft (A319) were redelivered during the second quarter. As of June 30, 2018, Volaris fleet was composed of 70 aircraft (8 A319s, 50 A320s and 12 A321s), with an average age of 4.5 years. At the end of the second quarter 2018, Volaris' fleet had an average of 184 seats, 70% of which were in sharklet-equipped aircraft.

Solid Balance Sheet and Good Liquidity

Net cash flow used in operating activities was Ps.493 million, in conjunction with cash flow used in investing activities of Ps.348 million, net cash flow used in financing activities of Ps.204 million, and a positive net foreign exchange differences of Ps.499 million, the net cash used in the second quarter was Ps.546 million. As of June 30, 2018, cash and cash equivalents were Ps.6,771 million, representing now 27% of last twelve months operating revenues. Volaris registered negative net debt (or a positive net cash position) of Ps.3,287 million and total equity of Ps.9,145 million.

Active in Risk Management

Volaris remains active in its fuel risk management program. Volaris used call options to hedge 65% of its second quarter 2018 fuel consumption, at an average strike price of US $1.74 per gallon, which combined with the 35% unhedged consumption, resulted in a blended average economic fuel cost of US$2.3 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.