Why Volaris Aviation is the Best Stock in the Airline Industry

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Jul 13, 2015

Several months ago, Volaris Aviation (VLRS, Financial) was a struggling company. High oil prices along with overcapacity in the Mexican air travel market weighed down the stock. As a result, the low-cost carrier has been struggling ever since it went public. However, the company has changed its fortunes this year as it is outperforming the airline sector. While most of the airline stocks have performed miserably this year, Volaris is up 42% YTD.

Being a low-cost carrier, the company has benefited more from the drop in oil price than other big name airline companies. As explained by Bloomberg:

“When crude oil is expensive, as it has been for the last several years, a low-cost airline's nonfuel cost advantage-lower wages, greater use of its airplanes, cheap coffee in employee break rooms, stingier medical benefits-becomes less important to the total cost base. A giant like United (UAL, Financial) or Delta (DAL, Financial) narrows the cost advantage a small rival like Spirit (SAVE, Financial) or Southwest (LUV, Financial) enjoys, while goosing higher revenues from its global network through higher fares and fuel surcharges. But when oil prices retreat, a nonfuel cost advantage becomes far more important for a low-cost carrier than for the giants.”

Volaris has benefited a lot from the massive dip in oil price. In fact, this has helped the company return to profitability as its operating margin for Q1 jumped from -18% in FY2014 to over 9% in FY2015. Also, unlike many airline companies, Volaris also has a healthy balance sheet. The company’s ended the last quarter with over $205 million as compared to the total debt of roughly $90 million.

Cost cutting and expansion into the U.S. market

The airliner has the most reduced unit cost in the business and is looking to decrease it more by adding five seats to each of its Airbus A320s. With oil price anticipated that would float around $60 per barrel till 2016 and declining unit expenses, Volaris' operating margin can increment to as much as 15%.

Additionally, Volaris is concentrating all the more on the U.S. air travel market as it hopes to benefit as much as possible from the expanding interest. The airliner aims to grow only 2%-4% in the Mexican market, but 33%-36% in the global market. Volaris is hoping to branch out its revenue streams, and this will demonstrate to be advantageous over the long haul.

The airliner's growth plans ought to procure advantages at it is expanding its presence at a quick pace. The growth pace is evident in the company’s May traffic report. The company recorded a 19% increase in travelers. So, I expect the company’s growth prospects to be fruitful.

Conclusion

Volaris has turned around its fortunes by tackling all the problems smartly. Oil prices are expected to remain weak for at least 12 months and this should act as a tailwind for Volaris. In addition, the company is increasing focus in the American market while restricting capacity growth in domestic market. This strategy will help Volaris grow revenue and earnings as the demand in U.S. market is a lot stronger than the Mexican market. All things considered, I think Volaris is attractively valued and should continue to grow.