Controladora Vuela Compañàa de Aviación, S.A.B. de C.V. (VLRS, Financial), better known as Volaris Aviation, has been my favorite pick in the aviation industry this year. The company has managed to outperform all big-name companies in 2015, and looking at the company’s recent quarterly report, I think it will continue rising throughout the year.
Volaris released its Q2 earnings earlier this week, recording improvements on almost all fronts. The company reported EPS of $0.22, beating the estimates by $0.05. On the revenue front, the company reported a year-over-year increase of 3.5%, surpassing the consensus target by $0.35 million.
Non-ticket revenues per passenger increased 23.2% year over year for the second quarter as the company refined the ancillary combos, implemented new commission based products in the booking flow and introduced new a la carte products.
International Expansion and better margins
The company’s strategy of focusing on international growth and limiting growth in Mexico will help the company. Mexican aviation industry is not growing as fast as the America’s and as a result, Volaris has benefited from its extensive expansion plans in the U.S. The company even launched four new international routes in the last quarter.
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 $55 per barrel till 2016 and declining unit expenses, Volaris' operating margin can increment to as much as 15%.
Goldman Sachs expects U.S. crude to average $52 and $57 per barrel this year and in 2016, respectively. The firm has remained bearish on crude for a long time and said:
“Crude oil prices have declined sharply over the past week on growing evidence that the market is still oversupplied. Specifically, June preliminary production data came in well above our forecast with a surge in OPEC production, in particular Iraq. Further, the first rise in the US oil rig count since December suggests that producers can ramp up activity given improved returns at $60/bbl WTI with costs down nearly 30%.”
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.
Conclusion
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. As evident by the quarterly numbers, this strategy has greatly benefited Volaris. The company should continue recording growth due to its international expansion, which is why I think the stock is a great buy.
