DeKalb seeks a class action against Volaris; AirAsia results raise questions as Qantas management shine

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By TESTCustomwebLP TESTCustomwebLP February 27, 2015 20:25

DeKalb seeks a class action against Volaris; AirAsia results raise questions as Qantas management shine

DeKalb County Employees Retirement System has filed a class action lawsuit in the New York federal court that claims Volaris’ IPO registration statement “negligently contained financial statements that were presented in violation of applicable accounting standards and the company’s publicly disclosed accounting policies”.

The filing accuses Volaris management of failing to disclose financial effects resulting from a change in reservation system and the effect of increased competition in key markets during its IPO roadshow. The filing states that Volaris omitted or misstated key information in filings ahead of its September 2013 listing of American depositary receipts. Volaris has issued a statement to say that it will use “all legal means” defend itself against this lawsuit.

Originally things looked very good for the IPO, the IPO price was US$12.00 per ADS, and on the opening day it closed up 16.75% at US$14.01. In fact many thought Deutsche Bank had priced too low. Since then though it is understandable to see why investors are disgruntled – Volaris ADRs have fallen by over 30% since the IPO while the Mexican listed shares are down over 20% since their listing as of yesterday morning. But then came the 2014 results yesterday afternoon.

Volaris reported total operating revenues up 24.3% year on year at Ps.3,958 million (US$263.86m) for the fourth quarter and up 8% year on year to Ps.14,037 million (US$935.8m) for the full year. Non-ticket revenues increased 81.2% for the fourth quarter year on year and 45.0% full the year from 2013. Non-ticket (ancillary) revenue per passenger increased 60.7% for the fourth quarter year on year to Ps313 (US$20.86) and up 32.2% for the full year 2014 from 2013 to Ps279 (US$18.6).

Total operating revenue per available seat mile (TRASM) increased to Ps.130.5 (US$8.7) for the fourth quarter year on year but decreased 0.5% for the full year to Ps.118.7 (US$7.9). Operating expenses per available seat mile (CASM) increased 1.5% and 0.5% for the fourth quarter and full year, year on year, respectively, reaching Ps.116.4 cents and Ps.116.9 cents (US$7.9 cents and US$7.9 cents respectively). CASM expressed in US cents decreased 9.9% and 10.7% for the fourth quarter and full year, year on year, respectively. CASM excluding fuel expressed in US dollars reached US$4.9 cents for the full year 2014.

Adjusted EBITDAR for the fourth quarter was Ps.1,239m (US$82.6m), a 156.1% increase year over year with an Adjusted EBITDAR margin of 31.3%, a margin increase of 16.1 percentage points. Adjusted EBITDAR for the full year was Ps.3,081m, a 9.8% increase year over year with an Adjusted EBITDAR margin of 22.0%, a margin increase of 0.4 percentage points. EBIT reached Ps.426m with an operating margin of 10.8% for the fourth quarter, a margin improvement of 17.0 percentage points. EBIT reached Ps.204m with an operating margin of 1.5% for the full year, a margin decrease of 0.9 percentage points.

Net income reached Ps.703m (US$46.8m) (Ps.0.69 per share / US$0.47 per ADS) and net margin of 17.8% for the fourth quarter, a net margin improvement of 20.9 percentage points. Net income reached Ps.605m (US$40.33m) (Ps.0.60 per share / US$0.41 per ADS) and net margin of 4.3% for the full year, a net margin improvement of 2.3 percentage points. During the fourth quarter the net increase of cash and cash equivalents was Ps.342m (US$22.8m) mainly driven by the resources provided by operating activities of Ps.470m (US$31.33m). Unrestricted cash and cash equivalents was Ps.2,265m (US$151m), representing 16% of last twelve month revenues.

Volaris CEO Enrique Beltranena commented: “The network adjustments and non-ticket revenue growth strategy together with a continuous focus on cost control produced fourth quarter adjusted EBITDAR, operating, and net margin expansions. We continue to see improvement in the market environment as industry capacity discipline drives a stronger fare environment. We also foresee potential benefits in 2015 from lower fuel costs and the continuation of non-ticket revenue growth”.

Volaris shares leapt by more than 10% in one hour on the news. These are good results and, although competition is increasing on almost all key Volaris routes, as mentioned by the lawsuit, we have to remember that the Mexican macroeconomic environment is generating more passenger growth than the competing airlines have to date been able to soak-up (refer to load factors).

Indeed Mexican GDP growth for the full year 2014 was 2.1% while consumer confidence increased 4.7% and 4.3% year on year in November and December of 2014, respectively. The Mexican General Economic Activity Indicator (IGAE) increased 2.04% in November of 2014 compared to the same period in 2013. FX rates during the 2014 period saw the Mexican peso depreciate 6.2% year on year against the US dollar, as the exchange rate devalued from an average of Ps.13.03 pesos per US dollar in the fourth quarter of 2013 to Ps.13.84 pesos per US dollar during the fourth quarter of 2014, but this has been more than offset by lower fuel prices of late and seemingly going forward for 2015.

Moreover Volaris is increasingly collecting revenue in USD (now around 29% of total) and as such there is a developing natural hedge against exchange rate fluctuation. Volaris has continued to remain active in its fuel risk management program with a combination of Jet Fuel swaps and call options. In the fourth quarter Volaris hedged 26% of fuel consumption at an average price of US$2.80 per gallon and combined with the 74% unhedged consumption resulted in a blended average economic fuel cost of US $2.42 per gallon.

So what does 2015 hold for Volaris? It is all about fleet management and unit revenue: TRASM and yield increased 20.7% and 6.5% for the fourth quarter year on year, respectively, as a result of a strong international revenue environment and recovering domestic market pricing conditions. Domestic capacity decreased 0.7%, reflecting capacity discipline and supporting yield recovery, while international capacity increased 14.0%, responding to a stronger fare environment. In the fourth quarter 2014, Volaris opened 18 new routes (nine domestic and nine international), during 2014 full year, Volaris opened 36 new point-to-point routes (24 domestic and 12 international).

In 2015 Volaris must hold load factors. Volaris booked 2.6 million passengers in the fourth quarter 2014, a 12.7% year on year growth rate. Volaris traffic (measured in terms of revenue passenger miles, or RPMs) increased 7.9%. On this Volaris’ total operating revenues were Ps.3,958m (US$263.8), an increase of 24.3% year on year. Yield increased 6.5% year on year. Passenger revenue per available seat mile (RASM) increased 11.6%, and total operating revenue per available seat mile (TRASM) was 20.7% higher, as a result of an improving fare environment and stronger non-ticket revenues. CASM for the fourth quarter 2014 was Ps.116.4 cents (US$7.9 cents), a 1.5% increase compared to the fourth quarter of 2013, CASM excluding fuel expressed in US dollars reached US$4.9 cents for the full year 2014.

As of December 31, 2014, Volaris had a fleet of 50 aircraft (32 A320s and 18 A319s), with an average age of 4 years. The airline expects to end 2015 with 55 aircraft, including two A321s in the second quarter of 2015. Volaris closed 2014 with the largest narrow body fleet among Mexican airlines.

Volaris is looking solid – 2014 has shown that this airline is an ancillary revenue master rather much like Spirit, but 2015 will be a telling year. Can the airline hold load factors or increase the same as capacity increases dramatically? I think they might just do it.

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By TESTCustomwebLP TESTCustomwebLP February 27, 2015 20:25