Controladora Vuela Compañía de Aviación, S.A.B. de C.V. (NYSE:VLRS) Q4 2022 Earnings Call Transcript

Controladora Vuela Compañía de Aviación, S.A.B. de C.V. (NYSE:VLRS) Q4 2022 Earnings Call Transcript February 22, 2023

Operator: Good morning, everyone. Thank you for standing by. Welcome to Volaris’ Fourth Quarter and Full Year 2022 Financial Results Conference Call. All lines are in listen-only mode. Following the Company’s presentation, we will open the call for your questions-and-answers. Please note that we are recording this event. This event is also being broadcast via a live webcast and may be accessed through the Volaris website. Those following the presentation via webcast may post their questions on the platform. The Management team will answer them during this call or the Volaris Investor Relations team will answer them after the conference call is finished. To send your questions via the webcast platform, click on the question mark below the video area – in the upper left corner. I would like to turn the call over to Ricardo Martinez, Investor Relations Director. Please go ahead, Ricardo.

Ricardo Martinez: Good morning, everyone, 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 Pous. They will be discussing the company’s fourth quarter and full year 2022 results. Afterward, we will move on to your questions. Again, please note that this call is for investors and analysts only. Before we begin, please remind 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 SEC, and Mexico’s CNBV.

These statements speak only as of the date they are made and Volaris undertakes no obligation to update or modify any forward-looking statements. As in our earnings press release, our numbers are in U.S. dollars compared to the fourth quarter of 2021, unless otherwise noted. And with that, I will turn the call over to Enrique.

Enrique Beltranena: Thank you, Ricardo and everyone, for joining us today. We are pleased to be speaking again after seeing many of you in New York for our Investors Day in early December. In the few months since then, you have undoubtedly heard from our peers about global airlines’ prevalent challenges as they look across 2023 and beyond. We are not in the same position. As we recap our full year 2022 and turn to our expectations for this year, Volaris has taken the necessary measures to ensure stability and profitable growth. We prepare for our growth by hiring and training almost 1,500 pilots and over 2,800 flight attendants among others in 2022 alone. Our net debt will remain stable in 2023. Our leverage is well below industry levels and will drop sequentially in the upcoming quarters.

We have a strong balance sheet and cash generation capabilities with a conservative debt position and healthy financing conditions. Our new fleet financing is signed until 2025 and cover sales and lease backs and CapEx associated with pre-delivery payments. 91% of our total debt is related to long-term growth through lease liabilities, with no exposure to rising interest rates. In addition, in April, we will enter a new era for Volaris receiving the first NEO delivery from the largest ever Airbus order placed by us along with Indigo’s portfolio airlines allowing us to reduce our CASM ex-fuel going forward through improved fleet ownership costs. Our fleet plan aims to drive further efficiencies, low cost going lower. Bottom line, we remain committed to delivering sustainable and profitable growth in a disciplined manner.

The combination of a differentiated revenue management strategy and strict control of costs, enable our operating earnings to offset the around $550 million of full year fuel price impact, resulting in a margin of 5.9% in the second half of the year. And throughout 2023, as you will see in our guidance, we expect significant EBITDAR expansion. Speaking of a differentiated revenue management strategy, we moderated fares in specific price-sensitive domestic market to deliver strong load factors and raised base fares in the international markets, including Central America to offset the higher fuel cost in our longer sectors. During the last quarter, ancillary revenues per passenger posted 86% increase compared to the same period in 2021. For the full year 2022, ASMs grew 26%, in line with our guidance, comprising 22% growth in the domestic market and despite Mexico’s FAA category status limitations, a remarkable 34% growth in our international markets.

We were able to grow in the transborder market between Mexico and the U.S., plus our Central American operation structures, played an essential role in this international growth, offsetting the cut to limitations and diversifying our growth expansion without relying on any particular region. As we said at our Investor Day, such growth was driven by a unique opportunity during the pandemic and in the future, we’ll continue growing at a moderate rate very well conscious of the market pricing behavior. Looking back at 2022, our team is proud to have transported more than 30 million customers last year, consolidating our position as the largest airline in Mexico by passengers. To put this into perspective, we transported over 85,000 passengers across our more than 560 operations each day.

This means that the number of passengers we fly daily is almost equivalent to the combined capacity of Yankee Stadium and Citi Field. Finally, during the fourth quarter, we closed negotiations for 2023 with our labor union committing to an 8.2% salary and benefits increase. In contrast, our low cost competitors in the U.S. have instituted labor pay increases well into the double-digits, sometimes into percentages in the 30s and 40s and are still struggling to start their operations. Approval of the labor contract, it’s clauses and the percentage increase in Volaris was achieved based on the new Mexican law with 88% of personnel voting in favor. Moving on to costs and to demonstrate our commitment to low-cost leadership, we successfully kept CASM ex-fuel for the entire year at $0.0426, nearly the same level as in 2021.

We’re one of the lowest cost operators in the world. In contrast, in the United States, CASM ex-fuel rose 17% for the legacy carriers and 24% for the low cost carriers. This is not only a cost control story, but an improvement of our competitive cost position in the transborder market. Volaris now has an even better cost structure than the U.S. carriers, widening our cross-border advantage. Volaris is in control of its unit cost trends. Down the road, our cost advantage will remain as unit revenue return to normal levels. As we affirmed at our Investor Day, for 2023 we are currently planning for ASMs to grow by around 10%. We are maintaining flexibility to add a few percentage points should market demand guarantee or should Mexico CAT1 be restored earlier this year.

This capacity growth has been planned proactively anticipating potential challenges such as delays for American manufacturers and the availability of spare engines. While we are convinced that moderating the pace of our capacity growth is the best decision, our long-term expansion opportunity is as potent as ever. We continue to capitalize on both switching and demographic tailwinds in Mexico and Central and South America. We are well positioned to leverage regional shifts in population and transportation trends, with diversified growth avenues. Our load factors are stellar and demonstrate Latin demand for our low-cost offering. Our routes to the U.S. also remain popular as we continue to connect families across the continent. We are prepared to shift capacity to northbound routes upon Mexico’s return to Category 1 status, which we remain, optimistic will happen in the next six months.

Next, I would like to address specific concerns, December’s winter storm Elliott. The storm hit the U.S. and affected Mexico’s Northwest airport. 46% of our fleet was operating in the affecting areas. Our most important impacted airport was Tijuana. We had a closing due to weather conditions in an airport where we, last year accommodated more than nine million passengers, an average of 24,000 passengers per day. The closing started on the 23rd of December and was extended until the 26, affecting almost 75,000 passengers. On December 27, in just 72 hours, we regularized operations in all Volaris’ systems, mitigated delays of passengers by relocating them to new flights and compensated them. Currently, Volaris has no outstanding customer complaints at the Mexican customer protection agency, Profeco.

Volaris did not have a material financial effect due to the storm. This storm could not have come at a worse time for our passengers, who were trying to get home to loved ones over the holidays. We knew how important travel was to our passengers over the holidays. Remember, our deep-rooted purpose to serve our visiting friends and family mark. Knowing how important travel was during the festive season, we pushed our system as hard as we could and delayed trips when we otherwise might have canceled, all in the hope of being able to deliver for our passengers. I reiterate my deepest apologies to our customers. All said, we did learn a lot from these circumstances. As a result, we are preparing much better recovery procedures, upgrading customer resolution software systems and dramatically improving our communication protocols, while we support improving management practices in our third-party contractors.

But again, if anything, the situation is a reminder of our strength and a company compared to our peers, the financial cost was minimum and our operations are strong enough to recover quickly. Regarding the recovery of Category 1, during the last quarter of 2022, progress was made on three different fronts. The FAA returned to Mexico this month to work on restoring Category 1 status and made substantial progress, closing 29 observations related to budgetary constraints and controls. The remaining 10 findings are related to changes in aviation law that, are necessary and related to regulations. In December, Mexico’s President submitted to Congress amendments to the aviation law, that address the remaining changes required to restore CAT1 status.

The Mexican authorities expect the next FAA assessment visit by the end of March. Finally, cabotage right within Mexico, the initiative submitted by the President to Congress include, some regulations to provide foreign carriers limited cabotage rights within Mexico’s domestic market. Two weeks ago, industry leaders met with the Secretary of Transportation’s team and Congress members to explain how well the Mexico domestic market is served and while we don’t consider the opening of cabotage right to be needed. We feel the discussions for approval of the law with all necessary regulations to clear CAT2 have been positive and have taken into account the industry concerns. We expect the final resolution of this matter before the end of March. Finally, as we enter the year’s first quarter, we see no signs of economic deceleration, nearshoring is reducing unemployment and great warehouse occupancy is taking place in the Northern states.

In fact, we are seeing healthy levels of traffic and solid booking curves for the upcoming spring season. This is partially due to several tailwinds in our core markets, including the trend of nearshoring, low unemployment rates, robust remittance flows and high levels of foreign direct investment. Now, I will turn it over to Holger who will provide greater detail on our fourth quarter and full year commercial and operational dynamics.

Holger Blankenstein: Thank you, Enrique, and good morning. Despite the mentioned challenges, we diligently accomplished what we planned in 2022, growing capacity into the mid-20s, while holding controllable cost nearly flat. We finished the year driving profitability with a solid fourth quarter. Let me give you more color on the quarter, starting with capacity. As Enrique mentioned, ASMs increased by 18% year-on-year for the entire network. This figure includes 16% growth in domestic and 24% growth in international markets. Critically, this expansion wasn’t dilutive, exhibiting a solid 87.3% load factor, up from 86.9% in the fourth quarter of 2021 and demonstrating that our new routes and deepened frequencies continue to attract demand.

Our diverse network encompasses Central and South America, allowing us to pursue profitable growth despite domestic market constraints. Given the outstanding demand for flights to and from those regions, we successfully passed through incremental fare increases in our international markets. In the fourth quarter, we launched three new routes that connect our Central American markets with significant Latin American communities in the United States, San Pedro Sula to Miami, San Salvador to Houston and San Salvador to Auckland. We are very excited about these routes, as they embody the strong trends we are seeing in the VFR travel and the recovery and growth of the Central American market. Our International markets across Central America, South America and the United States continue to exhibit strong demand.

Domestically, the routes we launched in 2022 from Toluca and Felipe Angeles are maturing as expected. We maintained around 30 aircraft flying from Mexico City International Airport and we’ll continue in 2023. We saw unit revenue grow in tandem with capacity in the fourth quarter with TRASM increasing both year-on-year and sequentially to $0.086 from $0.084 in the fourth quarter of 2021 and $0.082 in the third quarter of 2022. However, the quarter story was ancillaries, which registered $41 per pax, a record. Ancillaries also reached an all-time high proportion of our operating revenues at 42%. We are especially pleased with these results, for one, they are a step in the right direction towards our medium-term goal of having 50% of our operating revenues derived from ancillaries.

But more importantly, greater adoption of ancillary service will allow us to keep our base fares low, further stimulating demand, extending our low-cost advantage over peers and expanding a key competitive advantage against buses. In addition, we will accelerate our V.Club membership, which will be a tailwind to our ancillary revenues. Changes to this program will be launched at the end of this week. We are also opening a prominent channel for customers to further engage with Volaris offerings. In January 2023, we announced our participation in FEMSA’s loyalty program through OXXO, the largest retailer in Mexico, which will allow users to earn and burn daily points in an ecosystem of restaurants, apparel stores, retailers and much more. Upon launch at the end of this April, the program stands to be one of the largest affinity platforms in Latin America, with many notable brands and around 20 million users already signed-on, helping us attract even more first-time flyers.

As always, customer experience is a top priority for Volaris. As Enrique mentioned, our mandate to connect families across the Americas, especially around the holidays figured prominently as we contended with acute weather effects this December. Winter storm Elliott in the United States and severe fog in Tijuana impacted our flight service. However, it is essential to note that these delays did not reflect any deficiency in our technology or systems, but simply a disruption at a time when we had maximized our operations to enable homebound travel for as many members of families as we could. Importantly, we fully recovered flight service within 72 hours at a minimal cost, a testament to the people and technology we invested in. Discrete events aside, our operational performance was excellent in the fourth quarter, with an overall on-time performance of 70.4%.

We also raised the bar for efficiency, registering utilization records of around 900,000 ASMs per aircraft per day. Our operations were unwavering as loads on our flights remained robust throughout the quarter, with load factor surging into the 90%s in the last two weeks of December during peak travel. As we look towards the first quarter of 2023, we remain optimistic as we have not observed any signs of deceleration or of a looming recession. We saw healthy traffic growth at the beginning of the year and booking curves are solid into spring. We continue to see strong consumer demand in all markets, particularly in the United States and Central America. Now, I will turn the call over to Jaime to discuss our financial performance for the quarter.

Jaime Pous: Thanks, Holger. I want to discuss our fourth quarter and full year 2022 financial results, highlighting our strong financial performance despite the fuel price headwinds we saw throughout the year. We accomplished guidance on every line, particularly on our revenue and CASM ex fuel growth. Total operating revenues for the fourth quarter reached $820 million, a 22% increase compared to 2021, driven by higher unit revenue. For the full year 2022, Volaris reported total operating revenues of $2.8 billion, an increase of 29% compared to 2021 levels, in line with our guidance despite the aforementioned economic volatility. EBITDAR margin for the fourth quarter increased 2.4 percentage points sequentially to 25.2%, though it fell 11.7 points compared to the same period of 2021 attributable to higher fuel costs.

EBITDAR for the quarter totaled $207 million, an increase of 19% sequentially, though a 70% year-on-year decrease. Overall, for the full year 2022, the EBITDAR margin was 20.6%, a decrease of 16.1 percentage points compared to the 2021 figure. To note, our 2021 fuel prices, the EBITDAR margin, would have been nearly 37%. EBITDAR came in at $586 million, a decrease of 27% compared to 2021. Higher fuel cost drove total CASM to $0.08 for the fourth quarter, a 21% increase compared to the fourth quarter of 2021. Our average economic fuel cost increased by 45% year-over-year to $3.71 per gallon. Overall, for the full year 2022, Volaris registered a total CASM of $0.0795 compared to $0.0645 in 2021. Average economic fuel cost for the entire year surged 68% to $3.80 per gallon.

While we are seeing jet fuel prices contract as we move through the start of 2023, we expect them to remain above 2021 levels, with crack spreads also remaining at higher levels. We will continue managing controllable expenses, increasing our leverage on cost and supporting margin in the periods ahead. CASM ex fuel increased 7.9% and totaled $0.0439 for the fourth quarter. At the same time, for the full year 2022, remarkably Volaris posted CASM ex fuel of $0.0426, up just 0.3% year-on-year despite inflationary pressures throughout our operations remaining significantly higher year-over-year. Looking into 2023, we are focusing on restricting controllable costs given this environment. During the fourth quarter, we booked redelivery cost of $34.4 million netted by sale and leaseback gains for a total amount of $6.6 million.

On a unitary basis, this represented $0.0036 this quarter compared to $0.0018 in the fourth quarter of 2021. The ongoing transition to NEO engine option or NEO aircraft and maintenance cycle explains the increase. These cyclical events will continue onward during 2023 and 2024, and then gradually return to 2019 levels as we capture the benefits of our fleet renewal. Adjusted CASM ex fuel, which excludes fuel, redeliveries and sale and leaseback gains, total $0.0410 compared to $0.0393 in the fourth quarter of 2021. For the full year, adjusted CASM ex fuel fell 0.4% to $0.0397. For the fourth quarter, net income was $28 million, which translates into earnings per ADS of $0.24. For the full year 2022, Volaris reported a net loss of $30 million.

However, it is essential to remember that fuel expenses drove this loss in the first half of the year and we had a solid second half, returning to profitability once unprecedented volatility in oil prices is stabilized. The cash flow provided by operating activities in the fourth quarter was $168 million. Cash outflows used in investing and financing activities were $104 million and $102 million respectively. Furthermore, Volaris finished the quarter with a cash position of $712 million, representing 25% of the last 12 months operating revenue. While this was a slight reduction compared to previous quarters due to capital expenditures, these were mainly attributable to year-end maintenance and pre-delivery payments for our NEO aircraft. We feel comfortable with this level of capital expenditure in the short-term, especially as we transition into the NEOs. The long-term payoff is clear when comparing Volaris with the most efficient carriers in the world.

The main opportunity to drive our cost efficiency to the next level resides in the transformation and ownership of our NEO fleet. With that in mind, we work diligently on major fronts in 2022 to ensure that Volaris is appropriately invested in its future and insulated from the volatility in capital markets that many of our peers are experiencing. Last year, we signed contracts for sale and leaseback agreements for aircraft and deliveries through 2025, and over $500 million in financing to cover predelivery payments in that period. As Enrique mentioned, we will receive our first deliveries from the 2017 Indigo order with Airbus next quarter. As we said at Investor Day, our fleet plan is not conservative with our order book expected to grow by 6.6% annually through 2027 and flexible.

We look to extend through lease extensions and straight operating leases. Having a firm aircraft order book is especially important as the industry starts to gauge the impact of potential supplier delays, including from Airbus. While closely monitoring this, we can leverage aircraft contract extensions to mitigate the delays. Finally, during the fourth quarter, we closed negotiations for 2023 with our labor union committing to an 8.2% salary and benefits increase. In contrast, our low cost competitors in the U.S. have instituted labor pay increases well into the double-digits, sometimes into percentages in the 30s and 40s, and they are still struggling to establish operations. Moreover, we will continue to be conservative with our capital structure.

Volaris has one of the most robust balance sheets among Latin American carriers and our global peers. At the end of the fourth quarter, our net debt to EBITDAR ratio was 3.9 times. Our financial debt decreased by over 10% year-over-year as of the fourth quarter-end. As Enrique said, 91% of our total debt comprises leasing liabilities with fixed rates. Volaris has no refinancing pressure. Our fleet comprised 117 aircraft as of December 31, up from 101 at the end of 2021. We also added five new aircraft during the quarter. By the end of 2023, we expect NEOs to comprise 60% of our fleet, on our way to an all NEO fleet by 2027. As of the end of the fourth quarter, Volaris fleet had an average of 192 seats per aircraft, and an average age of 5.4 years, with 54% with NEO models.

We are seeing the benefits of the NEO transition already leading to a reduction of 1.2% in gallons per 1,000 ASMs compared to the previous year. We expect this trend to continue during the first quarter of 2023. As of today, the transition to NEOs has already represented cumulative savings of 99 million gallons or around $367 million. This is a core premise for our fleet transition, which will yield fuel savings over the next five years of approximately 300 million gallons or around $1 billion. We view this as the most effective fuel price hedge we can have. We are not managing for the short-term, but rather to create long-term value. Looking into 2023, we are seeing robust ongoing demand, which give us confidence that we will continue to see strong loads and unit revenues as we execute our capacity growth plan.

We also expect to extend our superior track record on controlling costs. For our full year 2023 guidance, we assume an average foreign exchange rate between MXN 19.25 to MXN 19.75 per dollar and average Gulf Coast jet fuel price between $3 and $3.1 per gallon. Taking to a consideration these variables, we expect ASM growth around 10% versus 2022. This growth rate anticipates potential challenges such as aircraft manufacturer delays and engine availability. Total revenue to be in the range of $3.2 billion to $3.4 billion, CASM ex fuel to be in the field of $0.046 to $0.048, EBITDAR margin between 29% to 31%, CapEx of around $300 million net of finance predelivery payments. And finally, the net debt to EBITDAR ratio below or equal to 2.5 times with capacity moderating, our heavy focus in 2023 will be on profitability, mainly as we drive toward our medium-term goal of a 33% EBITDAR margin.

Now, I will turn the call over to Enrique for closing remarks.

Enrique Beltranena: Thank you very much, Jaime. To finish today, I would like to remind everyone that our triple goal from Investor Day to double revenue, EBITDAR and free cash flow from 2019 levels by 2025, remains top of mind for our team. Notably, we are 58% of the weight doubling revenue as of December 31, 2022. And our 2023 guidance shows that we expect to advance significantly in EBITDAR and free cash flow generation this year. No matter the environment, we remain disciplined on costs, prudent with capital deployment and focused on rewarding our customers and investors. I want to finish thanking our ambassadors for their significant contributions in 2022. I firmly believe that we have a remarkable group of hard working ambassadors and committed shareholders within our family. Thank you very much for listening and for all your contributions during 2022. Operator, please open the line for questions.

Q&A Session

Operator: Thank you. Our first question comes from Duane Pfennigwerth with Evercore ISI. Please go ahead.

Duane Pfennigwerth: Hi, thank you for the time. So, we noticed some changes or maybe volatility in the schedules into the second quarter on Mexico to U.S. capacity and I wonder, I know you made some brief comments in the call, but has there been any movement on kind of the CAT2 upgrade? Is there any chance that that gets accelerated?

Enrique Beltranena: Duane, thank you very much. This is Enrique. We have seen the process going on really well. I mean basically, as we said, I mean from the 39 points that were raised by the FAA, there’s only 10 missing from which about half of them are related to the law and the other half are our systems and things that need to be put in place. We’ve had – the FAA here a week ago, which went through the process, and now they are planning to come back by the end of March and once they come back and provided that they decide to go ahead and raise the category, there is a couple of months that requires, I would say the process to go through into the U.S. government authorities. And then we’ll probably have a resolution. I need you guys to remember that once that happens, we still need to sell the routes.

So, ramping-up capacity from our perspective results is something only that is going to happen by the last quarter. Okay. So, that’s I would say the fastest process that we can think about.

Duane Pfennigwerth: Okay, that’s great. So, that’s kind of consistent with what you’ve said in the past. And then I wanted to ask you just a fleet-related question on the A321s, maybe for Holger, you know, what sort of missions or what sort of markets are best suited for these A321s larger gauge A321s met with them and the network or are there some markets where kind of the margin profile is you know is less attractive? And then, can you just speak generally to lease rates that you’re seeing on these A321s that you’re taking delivery of and how that compares to the lease rates on the aircraft that are out the door redelivering?

Holger Blankenstein: Duane, thank you. This is Holger. So, on the A321 missions what we’ve done in this year is, we’ve changed the mission to longer stage length. So, that gives us a better cost profile, in terms of generating more ASMs per aircraft per day, makes the seat more productive, and as we see a lot of strength in the U.S., Mexico market, we did change the allocation of the A321 to more U.S. flying as well and more Tijuana flying. So, we’ve slightly changed the mission profile of the A321 to the benefit of costs and revenues. And then I’ll pass it over to Jaime for your question on – lease rates.

Jaime Pous: Hi Duane, on lease rate factor, Duane, remember the first deal that we signed, we signed it before they were flying in 2015 and once we’re at the tail point on the market, the new ones that we are getting are substantially below that range. We are going to start getting the benefit going forward on that. In addition, as we mentioned in the call, we are getting the benefit of receiving the Indigo order aircraft, and the sale and leasebacks are based on those NEO prices that we got from Indigo.

Duane Pfennigwerth: Okay. Thank you.

Operator: Our next question comes from Helane Becker with Cowen. Please go ahead.

Helane Becker: Hello, thanks, operator. Hi, everybody. I hope all is well. So maybe this is easier. I just have a couple of questions here. Can you say what percent of the increase in CASM ex is related – for 2023 is related to labor cost increases and are there any other headwinds we should know about?

Enrique Beltranena: Most of the CASM increase is related to the fleet and basically on the delivery expenses and depreciation, not related to the labor. The labor doesn’t affect or impact increasing the CASM ex for 2023, it’s mainly fleet predelivery expenses, maintenance and a little bit airport costs in particular for international operations.

Helane Becker: Okay, that’s very helpful. Thank you. And then my other question is probably for Holger. I think Holger, you said that you are moderating fares in your core domestic market, and I think I want to make sure I got this right, raising fares in the international markets. Can you say, A) if that’s correct and B) can you say whether or not there is greater uptick – uptake rather on ancillaries in international versus domestic or is it about the same?

Holger Blankenstein: So, Helane, this is Holger. Regarding the fuel pass through, we’ve been quite successful given the strong demand in international markets, to a company that’s with the fare increase also in the U.S., Mexico, as well as the Central America U.S. markets, and loads continue to be very healthy despite fare increases. In the domestic market, we have a two-sided picture. We have the trunk fleets that are completed and there we opted to go for high load factors, stimulate volumes, stimulate markets, and maintain our base fares quite low, and volume generates higher ancillary revenues, right, because – people buy additional services after they buy the ticket. And then we have 46% of our routes that are without competition, that only compete against buses.

And there we have a little bit more flexibility on the pricing side and we have taken advantage of that in the domestic market as well. So, that’s what’s happening. On the pricing side, if you look at the ancillary revenues per passenger, typically what we see in the international markets, ancillary revenues per passengers are higher as well, because people just take more bags on their international trips.

Helane Becker: Got it, okay. Thanks, Holger. Thanks, team. That’s all very helpful.

Holger Blankenstein: Thanks Helane.

Enrique Beltranena: Thank you, Helane.

Operator: Our next question comes from Michael Linenberg with Deutsche Bank. Please go ahead.

Shannon Doherty: Hi, good morning. This is actually Shannon Doherty on for Mike. So, it sounds like demand for the March quarter is strong in Mexico, can you update us on demand profile in Costa Rica and the El Salvador operations? And are some of the approximately eight aircraft you are taking this year expected to be used under these AOCs to serve the US market? Thanks.

Holger Blankenstein: Sure. This is Holger again. So, what we said in the past is that the Central American recovery is six to 12 months behind what we saw in terms of recovery from COVID in Mexico and the U.S. So, we are seeing a strong rebound of demand in our AOCs in Central America that is reflected in the high load that is seen in the traffic reports in the past months. So, we are quite happy with the development and the recovery in Central America. We will allocate additional capacity to Central America this year. We currently have six aircrafts flying in Central America, and we expect that some of the deliveries this year are going to go through Central America as well. Actually we have announced two new routes, as Enrique mentioned in his script and we will continue to develop our network in Central and in South America.

Shannon Doherty: Great thanks, that’s helpful. And on the news about Aeromar, I know that they may not have been really a notable competitor to you guys. But can you just comment on how its bankruptcy may impact you? Maybe you pick up some share between Mexico City and the beach destinations, any color there would be helpful?

Enrique Beltranena: Yes look, this is Enrique Beltranena. We feel very sorry about the cease of operations of Aeromar and what we’re doing right now is helping the government with the stranded passengers and we have allowed their former employees to apply for the jobs in Volaris, provided obviously that they fulfill our internal requirements and certifications. Aeromar, it’s important to say it’s, first, it was a very small niche high priced regional airlines and as a result of that, it was really small and the impact in the market is very, very measured. Okay, very small. I think that it’s — there is no impact in any of the larger carriers. And I think something which is really important to say is that this is probably the last carrier that was operating in Mexico with a lot of financial problems for many, many years. And that I will say something which is really important, by no means it reflects a systemic failure of the Mexican civil aviation system.

Shannon Doherty: Thank you, tremendously helpful. Have a good one, guys.

Enrique Beltranena: Thank you.

Operator: The next question comes from Guilherme Mendes with JPMorgan. Please go ahead.

Guilherme Mendes: Good morning, everyone. Thanks for taking my questions. I just have two questions. The first one is a follow-up on the – guidance and the assumptions behind the guidance. So, if you could share the breakdown between domestic and international out of the 10% capacity increase for the year? And Enrique mentioned on the beginning saying that you have flexibility to adjust your capacity according to demand or according to any changes on the FAA discussion, just wondering what’s, the blue sky scenario for capacity for the year if things go right? And the second question is related to nearshoring, it’s basically how should we think about nearshoring just leading to traffic in the short and longer term? Thank you.

Enrique Beltranena: So, regarding the breakdown of the growth rate of 10% for the year, we are seeing slightly higher international growth this year despite being Category 2 in Mexico that is driven by the up-gauge of our U.S./Mexico routes to A321 capacity, but also the already mentioned growth in our Central American seats with the U.S., and international markets.

Jaime Pous: And we wanted the flexibility on growing that from 10% to 13%, . It’s basically remember that we had six we delivered this year, three of them in the first half, three of them in the second half. We already were really proactively looking at potential delays from Airbus, as we already extended the three aircraft that we already delivered, but the original is that we deliver on the first half, and we have the flexibility for the second half to keep those three aircrafts, we see that CAT1 coming earlier, and also a sub operating case, further delays from the already once, that Airbus has got the files to cover for that challenge that the industry is facing.

Enrique Beltranena: Guilherme, this is Enrique Beltranena. I wanted to say that our plan considers CAT1 to be recovered as we said, by the fourth quarter, and we have planned a shift of domestic capacity to fulfill the purpose. But – we see positive progress, we wouldn’t expect it to be commercially viable before this time.

Guilherme Mendes: That’s super clear, thank you and about the nearshoring question?

Holger Blankenstein: We believe that nearshoring continues to be macroeconomic trends that we observe in the long-term, which puts Mexico in a very good position economically for the foreseeable future. And we are seeing that effect in our markets which are mostly concentrated in the Northern part of Mexico. We’ve seen strong volume and strong demand in those markets and we believe that that is partially driven by the nearshoring effect and the higher employment rates we’re seeing in the northern part of the country.

Enrique Beltranena: Yes, I was in – in Monterrey a couple of weeks ago and then I was in Tijuana also, and it is impressive to see the number of operations and investment of companies, enlargement of warehouse facilities and – and it is important to say, I mean there is, for example in Monterrey, while I was in Monterrey, there’s not one single square meter of warehouse available right now and unemployment is down to zero.

Guilherme Mendes: That super clear, thanks for taking the questions.

Enrique Beltranena: I think it is important — thank you, Guilherme.

Operator: Our next question comes from Filipe Nielsen with Citi. Please go ahead.

Filipe Nielsen: Hi guys, good morning, and thank you for taking my questions. So, I have two questions from my side, one thing is, have you learned anything new from starting operating with Santa Lucia Airport instead of Mexico City airports? And the second question would be, to what extent would Allegiant and Viva Airbus alliance have any impact or growth overlap with your routes – organizations? Those are the two from my side? Thank you.

Holger Blankenstein: Thank you. This is Holger. I’ll quickly comment on the Santa Lucia moves, we started operations in the new airport last March. So, approximately one year ago and sometime this year, routes are still in ramp-up and are on track versus our original estimates. We’ve seen good load factors. Load factors are healthy and growing steadily. Obviously, this is a completely new airport, so it takes some time for customers to understand how to get there and what it takes to fly from there. We currently have 11 routes operating from Santa Lucia with 19 take-offs per day and I would say the only caveat is that the base fares are still behind Mexico City International Airport levels. And we’ve intentionally sustained them lower than Mexico City International to continue stimulating demand and make traffic shift from Mexico City to the new airport and as a result, we are currently not planning on adding more capacity from Santa Lucia, we are waiting for the existing routes to mature.

Enrique Beltranena: In the relationship – this is Enrique Beltranena. Relationship deal, we don’t think it’s going to affect dramatically our network, because we are a DCP rents and relative’s network rather than a relation network.

Filipe Nielsen: Great, thank you very much, guys.

Operator: Our next question comes from Josh Milberg with Morgan Stanley. Please go ahead.

Josh Milberg: Hi, everyone. Thank you for the call. My first question relates to your jet fuel guidance for 2023 which I believe you framed in terms of the U.S. Gulf Coast level rather than the economic cost. So, I just wanted to ask, what was the logic for that change, if I understood correctly. And then also what spread you anticipate between the commodity price and the all-in fuel price for this year and eventually what could move that spread up or down? That’s the first question.

Jaime Pous: Thank you, Josh. This is Jaime. We basically use the Gulf Coast because it’s basically the easiest way for you to rise – to see which is, the one that is impacting most of – what we do there tinkering. If you want to write-off by a $0.40, it will get you a total economic.

Josh Milberg: Okay that’s great, Jaime. So you’re pretty confident in that $0.40 level for this year and don’t see much variability around it?

Jaime Pous: So, the fare makes a lot of also to change. In public and also in change there the game, but we are pretty comfortable. So far, it has been stable over the past six months.

Josh Milberg: Okay then, perfect. And then, my second question was a follow-up to an earlier question on your CASM ex guidance and I just wanted to see if you could give us a rough idea of what level of aircraft redelivery costs and what level of sale leaseback gains are embedded in your 2023 CASM ex guidance?

Jaime Pous: I’m just getting the number. Josh, if you have another one, I can take a look at the number or get back – with you later. But it’s basically a, fair ASMs, is going to be call it $0.44 impact on redeliveries and sale and leaseback is minimal, $0.01.

JoshMilberg: Okay. That’s very helpful. Really appreciate it.

Jaime Pous: You’re welcome, Josh.

Operator: Your next question comes from Rogerio Araujo with Bank of America. Please go ahead.

Rogerio Araujo: Hi, gentlemen. Thanks so much for the opportunity. So, in my view, there was the assumption in the guidance that is basically the company capturing the jet fuel price reduction expected for the year. Can you confirm that and if so, can you please provide more details on the competitive environment, how comfortable Volaris is with supply being let’s say at a comfortable level this year and also on – a few hedges if there is anything in place at this moment? Thanks very much.

Holger Blankenstein: So, I’ll take the first question on capacity and competitive environment, this is Holger. As you recall, we grew quickly since the pandemic to build our position in Mexico and we’ve seen similar moves from the competitors in Mexico. Now we have met those objectives and we will return to a more historic growth rate in the high single-digits, low-teens and that’s precisely what you’re seeing in 2023. We are planning a 10% ASM growth rate versus ’22 and that is much lower and back to the historical growth rates. And that again already considers Airbus delivery delays and engine delays. And so, that is reflected there and we are seeing similar moderation of growth rates by our competitors. So, we believe we are in – we continue to be in a pretty healthy competitive environment.

Jaime Pous: With respect to the fuel hedging, we don’t have any position of hedging for 2023.

Rogerio Araujo: Okay. Thanks very much.

Holger Blankenstein: Thank you, Rogerio.

Operator: Your next question comes from –

Enrique Beltranena: So thank you very much for – so, thank you very much to everybody as we depart 2022 and going to 2023. I want to thank you, you, especially you, our family of ambassadors, the Board of Directors, the bankers, the lessors and suppliers for their commitment and support. I look forward to another strong year ahead. And as I said during the Investor’s Meeting, I think we are just getting started. Thank you very much.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.