Volaris Reports Third 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 third quarter 2018.

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

Third Quarter 2018 Highlights

Total operating revenues reached Ps.7,316 million for the third quarter, an increase of 11.3% year over year.
Total ancillary revenues were Ps.2,220 million for the third quarter, an increase of 23.5% year over year. The total ancillary revenues per passenger for the third quarter were Ps.474, increasing 10.1% year over year.
Total operating revenues per available seat mile (TRASM) were Ps.134.9 cents for the third quarter, a decrease of 1.9% year over year.
Operating expenses per available seat mile (CASM) were Ps.130.4 cents for the third quarter, an increase of 4.8% year over year; with an average economic fuel cost per gallon of Ps.43.5, increasing 36.9% year over year, and an average exchange rate of Ps.18.98, a year over year increase of 6.5%. Operating expenses per available seat mile excluding fuel (CASM ex fuel) were Ps.81.9 cents for the third quarter, a decrease of 7.9% year over year.
Operating income was Ps.246 million for the third quarter, with an operating margin of 3.4%, equal to a year over year operating margin decrease of 6.1 percentage points.
Net loss was Ps.119 million (Ps. (0.12) per share / US$(1.17) per ADS for the third quarter, with a net loss margin of (1.6%), equal to a year over year net margin decrease of 12.6 percentage points.
At the close of the third quarter, the Mexican peso had appreciated 5.3% against the U.S. dollar with respect to the end of period exchange rate of the previous quarter. The Company booked a foreign exchange loss of Ps.419 million as a consequence of our U.S. dollar net monetary asset position.
Net cash flow used in operating activities was Ps.136 million, in conjunction with cash flow provided by investing activities of Ps.20 million, net cash flow used in financing activities of Ps.247 million, and a negative net foreign exchange difference of Ps.326 million; the net cash decrease in the third quarter was Ps.689 million. As of September 30, 2018, cash and cash equivalents were Ps.6,082 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 third quarter were stable, with same store sales[1] increasing 5.3% year over year; remittances[2] increased 9.68% year over year during July and August 2018; and the Mexican Consumer Confidence Balance Indicator (BCC)[3] increasing 17% year over year in third quarter 2018.
Air traffic volume increase: The Mexican DGAC reported overall passenger volume growth for Mexican carriers of 8.1% year over year in July and August; domestic overall passenger volume increased 7.4%, while international overall passenger volume increased 10.4%.
Exchange rate volatility: The Mexican peso depreciated 6.5% year over year against the US dollar, from an average exchange rate of Ps.17.82 pesos per US dollar in the third quarter 2017 to Ps.18.98 pesos per US dollar during the third quarter 2018. At the close of the third quarter, the Mexican peso had appreciated 5.3% with respect to the end of period exchange rate of the previous quarter. The Company booked a foreign exchange loss of Ps.419 million, mainly as a consequence of our US dollar net monetary asset position.
Higher fuel prices: The average economic fuel cost per gallon increased 36.9% to Ps.43.5 per gallon (US$2.3) in the third quarter 2018, year over year.

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

Passenger traffic stimulation: Volaris booked 4.7 million passengers in the third quarter of 2018, up 12.1% year over year. Volaris traffic (measured in terms of fare revenue miles, or RPMs) increased 9.9% for the same period. System load factor during the quarter decreased 2.7 percentage points year over year to 83.5%.
Positive TRASM trend almost at the same level of last year: For the third quarter of 2018, yield decreased 2.8% with TRASM decreasing 1.9%, year over year. During the third quarter 2018, in terms of ASMs, domestic capacity grew 15.8%, while international capacity increased 8.4%, year over year.
Total ancillary revenue growth: For the third quarter of 2018, total ancillary revenues and total ancillary revenues per passenger increased 23.5% and 10.1% year over year, respectively. The total ancillary revenue generation continues to grow with new and matured products, appealing to customers' needs, representing 30.3% of the total operating revenues.
New routes: In the third quarter 2018, Volaris announced 11 domestic routes from its focus cities Tijuana and Guadalajara, as well as from Mexico City and Bajio; and three international routes, two from Bajio to Sacramento and San Jose, California and one from Guadalajara to Charlotte, North Carolina.

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

CASM and CASM ex fuel for the third quarter 2018 were Ps.130.4 (US$6.9 cents) and Ps.81.9 cents (US$4.3 cents), respectively. This represented an increase of 4.8% and a decrease of 7.9%, respectively; mainly driven by higher average economic fuel cost per gallon of 36.9% and an average exchange rate depreciation of 6.5%, which were offset by a tightening cost control discipline.

Young and Fuel-efficient Fleet

During the third quarter 2018, the Company incorporated three aircraft (two A320 neo and one A321 neo) to its fleet; during this quarter no redeliveries were registered. As of September 30, 2018, Volaris' fleet was composed of 73 aircraft (8 A319s, 52 A320s and 13 A321s), with an average age of 4.6 years. At the end of the third quarter 2018, Volaris' fleet had an average of 184 seats, 72% of which were in sharklet-equipped aircraft.
Solid Balance Sheet and Good Liquidity

Net cash flow used in operating activities was Ps.136 million, in conjunction with cash flow provided by investing activities of Ps.20 million, net cash flow used in financing activities of Ps.247 million, and a negative net foreign exchange differences of Ps.326 million; the net cash used in the third quarter 2018 was Ps.689 million. As of September 30, 2018, cash and cash equivalents were Ps.6,082 million, representing now 23% of last twelve months operating revenues. Volaris registered negative net debt (or a positive net cash position) of Ps.2,889 million and total equity of Ps.8,863 million.

Active in Risk Management

Volaris remains active in its fuel risk management program. Volaris used call options to hedge 58% of its third quarter 2018 fuel consumption, at an average strike price of US $1.78 per gallon, which combined with the 42% 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.

IFRS 16: Leases

The Accounting Standards Board (IASB) issued IFRS 16 Leases, which is effective for annual reporting periods beginning on or after January 1, 2019, with limited earlier application permitted. This new standard will replace the current IAS 17 Leases standard.
Under IFRS 16, leases are accounted for based on a 'right-of-use model'. The model reflects that, at the commencement date, a lessee has a financial obligation to make lease payments to the lessor for its right to use the underlying asset during the lease term. The lessor conveys that right to use the underlying asset at lease commencement, which is the time when it makes the underlying asset available for use by the lessee.
The most significant impacts of the new standard in airlines:
The new standard requires almost all lease agreements to be recognized on the balance sheet; assets and liabilities will be increased significantly.
Almost all the lease payments will no longer be recognized as part of the "rent expenses", but as part of the "depreciation expense".
The standard includes certain recognition exemptions: a) leases with a lease term of 12 months, and b) leases where the underlying asset has a low value when new, of US$5,000 or less.
IFRS 16 permits two different adoption models. Full retrospective model or modified retrospective model.
The impact of U.S. dollar volatility will have greater impact in Mexican airlines with Mexican peso as functional currency. Accounting and taxes implication for the impact of non-cash foreign exchange gain or losses as consequence of the recognition of the required lease liabilities under the adoption of this new standard.
Cash Flows impact. Under IAS 17 (current standard) cash flows related to rent payments are recorded as part of the operating cash flows, but under IFRS 16 the cash flows related to rental payments will be presented as part of the financial cash flows.
Income tax accounting. a) Recognition and measurement of deferred tax assets and liabilities; and b) Assessment of the recoverability of deferred tax assets.

Additional disclosures
The Company is in process of completing an assessment of the potential impact of adopting IFRS 16.
Investors are urged to carefully read the Company's periodic reports filed with or furnished to the Securities and Exchange Commission, for additional information regarding the Company.