Earnings call: Volaris reports strong Q1 results, eyes cautious growth

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Earnings call: Volaris reports strong Q1 results, eyes cautious growth
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Volaris (NYSE: VLRS) has announced a notable improvement in its financial performance for the first quarter of 2024, with a net income of $33 million, marking a significant year-over-year increase. Despite facing challenges with engine and aircraft issues, the airline has executed well, prioritizing profitability and operational efficiency. Total operating revenue saw a 5% increase, while unit revenue surged by 21%. Volaris managed these results amid preventive inspections that grounded approximately 60 engines, for which they received compensation from Pratt & Whitney. The company remains cautious but optimistic about the future, revising its full-year guidance upwards and projecting to recover 2023 capacity levels by the end of 2025.

Key Takeaways

  • Volaris achieved $33 million in net income for Q1 2024.
  • Total operating revenue grew by 5%, with unit revenue up by 21%.
  • Approximately 60 engines were grounded for inspections, with compensation from Pratt & Whitney.
  • Volaris received two new A321neos ahead of schedule, aiding during peak travel periods.
  • The company is cautious about adding too much capacity and is focusing on yield optimization.
  • Ancillary revenues comprised 51% of total operating revenues.
  • Volaris revised its full-year 2024 guidance upwards, expecting a full capacity recovery by end of 2025.

Company Outlook

  • Volaris plans to fully recover 2023 capacity levels by the end of 2025.
  • The airline received two new A321neos ahead of schedule, which helped to meet robust demand.
  • A new base schedule has been implemented, with capacity reallocated to U.S.-Mexico routes.
  • Volaris aims to maintain cash balances between 25% to 30% of revenue.
  • The company looks forward to future visits to New York, Boston, and Chicago.

Bearish Highlights

  • The company is skeptical about progress in enhancing maintenance capacity and availability.
  • Volaris is experiencing challenges due to accelerated engine inspections.
  • There is a cautious approach to introducing too much capacity on individual routes.

Bullish Highlights

  • Volaris saw good performance in international markets, especially during the peak holy season.
  • The airline has a positive outlook with healthy spring and summer booking trends.
  • Ancillary revenue per passenger has potential upside, and Volaris is shifting focus towards international markets.


  • Demand was reduced in April due to Easter falling in the first quarter.
  • Volaris expects an ASM reduction of approximately 18% year-over-year in the second quarter.

Q&A Highlights

  • Volaris executives discussed the impact of Pratt & Whitney engine issues and Aeromexico's Boeing (NYSE: BA ) 737 MAX problems on their capacity and unit revenue.
  • The company does not have any hedging for fuel or foreign exchange, relying on a natural hedge due to positive revenue in U.S. dollars.
  • There are no indications of a category one downgrade from the FAA for Mexico.

Volaris has effectively navigated through a challenging period, marked by engine inspections and capacity adjustments, to post a strong first-quarter performance. The airline's strategic focus on profitable markets and optimization of ancillary revenues has paid off, as evidenced by the positive financial outcomes and upward revision of its full-year guidance. With a cautious yet optimistic approach, Volaris is poised to continue its growth trajectory while maintaining operational resilience and financial stability.

InvestingPro Insights

Volaris' financial performance in Q1 2024 has shown resilience and strategic acumen, leading to a commendable net income and revenue growth. In light of these results, examining the company through the lens of InvestingPro data and tips can provide a more nuanced understanding of its market position and future prospects.

InvestingPro Data:

  • The company's market capitalization stands at $971.35 million USD, reflecting its current valuation in the market.
  • With a P/E ratio of 8.2, Volaris trades at a multiple that suggests investor confidence in its earnings potential.
  • The revenue growth over the last twelve months has been 14.46%, indicating a robust expansion in the company's financials.

InvestingPro Tips:

  • Analysts predict that Volaris will remain profitable this year, aligning with the positive net income reported in Q1 2024.
  • The stock has experienced a significant return over the last week, with a 12.92% price total return, which may interest investors looking for short-term gains.

For investors seeking more in-depth analysis and additional insights, there are 12 more InvestingPro Tips available for Volaris at https://www.investing.com/pro/VLRS. These tips can provide valuable guidance on the company's valuation, expected sales performance, and stock price volatility. To access these insights and enhance your investment strategy, use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.

Full transcript - Ctrld Vl Cmp Avn (VLRS) Q1 2024:

Operator: Good morning, everyone. Thank you for standing by. Welcome to the Volaris First Quarter 2024 Financial Results Conference Call. All lines are in a listen-only mode. Following the company's presentation, we will open the call for your questions. Please note that we are recording this event. This event is also being broadcast via live webcast and can be accessed through the Volaris website. At this point, I would like to turn the call over to Ricardo Martinez, Investor Relations Director. Please go ahead, Ricardo.

Ricardo Martinez: Good morning, 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 first quarter 2024 results. Afterwards, we will move on to your questions. Please note that, this call is for investors and analysts only. Before we begin, please remember 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 the Mexico CMDV. 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 first quarter of 2023 unless otherwise noted. With that, I will turn the call over to Enrique.

Enrique Javier Beltranena Mejicano: Good morning, everyone and thank you for joining us today. I am proud to start by saying our Volaris team delivered strong first quarter results. It was certainly a challenging quarter, as we ramped up the engine accelerated inspection processes that drove challenges in delivering a good schedule, but I'm proud that, the team was able to execute on our plans so well. Over the last six months, our primary focus has been directing operations to enhance our customer service, managing ongoing changes to the schedule, as the fleet plan changes and continuing our emphasis on obsessive cost control. Despite the ongoing challenges with engine and aircraft issues, we continue to execute well and remain focused on delivering shareholder value. During the first quarter, we undertook preventive accelerating inspections, resulting in the grounding of approximately 60 engines, for which we received pre-arranged compensation from Pratt & Whitney. We'll continue to look for ways to mitigate the impact of these engine removals and we'll continue to work closely with Pratt to accelerate the required work on the new engines. However, despite Pratt & Whitney's optimistic discuss on enhancing MRO capacity and availability of materials and spare parts, Volaris remains skeptical about tangible progress in these areas. While engine removals to-date have gone accordingly to schedule, an aircraft on ground during the quarter were consistent with the plan, we are being conservative in our expectations for when engines will return into service. Even with all this complexity, we have been able to drive strong results through nimble planning, a flexible network and our ability to make rapid strategic adjustments, we generated a strong increase in TRASM and ancillaries while cost remained controlled. As a result, we achieved net profitability in the first quarter, posting a $33 million net income. This marks a significant achievement as historically due to seasonality, our first quarter has resulted in net losses. The last time we recorded a net profit in the first quarter was back in 2019. As we execute our strategy, we continue to prioritize profitability when allocating capacity. On last quarter's call, we outlined three core pillars for navigating the current environment. One, protecting our fleet and capacity. Two, optimizing our network and driving profitability and three, elevating the passenger experience and cultivating talent for our future growth. Volaris continues to deliver against each of these pillars and our strategy has proven effective and is bearing fruit. Now let's review how we closed the quarter. Total operating revenue grew 5%, with unit revenue rising 21%. Our ASMs contracted 13% due to engine accelerated inspections, which was better than our prior guidance of 16% to 18%. This improvement of our guidance is mainly driven by the timing of aircraft deliveries. EBIT and EBITDAR margins were 14% and 31%, respectively, expanding by 18% and 14% percentage points as compared to the prior year, respectively, and ahead of our expectations. As capacity returns to our fleet, we are committed to being prudent and rational with our growth. Again, prioritizing profitability. Based on current planning for engine shop visits, we expect to fully recover 2023 capacity levels by the end of 2025. In the first quarter, we have received two new A321neos from Airbus ahead of schedule, both of which had engines with full life engine disks. The timing of this additional capacity enable us to incrementally capture robust demand from Mexico's Holy Week and Easter. With the rationalization of Mexican capacity and the restoration of FAA Category 1 status, we have implemented a completely new base schedule that delivers a more consistent and reliable itinerary. The changes to the network were necessary, given we had to reduce operations at Mexico City International Airport to 43 slots per hour and we needed to develop better recovery in the schedule, given ongoing engine challenges. Additionally, we reallocated significant capacity from the Mexican domestic market to U.S.-Mexico routes, while preserving our position in core domestic markets. This strategy shift enables us to prioritize routes that should have stronger unit revenues, while managing a network with reduced ASMs and no growth. In addition, we are working to reactivate and grow our culture with Frontier, which will drive incremental market opportunities, but we don't expect to see any impact until late summer. Overall, we're pleased with our business performance. At this capacity levels, despite increased unit costs due to reduced ASMs. Our team will remain focused on executing our operational plans. We will continue to focus on managing capacity, driving unit revenues, delivering margin expansion, strict cost control, being conservative with debt and achieving results that are inline with our guidance. For years, we have been discussing building an airline with cost discipline, the ability to execute as planned and the flexibility to adjust as needed. Today, Volaris is delivering results and we are confident, we can continue to do so in a consistent basis. With that, I'll now turn the call over to Holger to discuss the quarter's commercial trends and operating performance.

Holger Blankenstein: Thank you, and good morning. In the first quarter, Volaris experienced robust demand, especially in the domestic market, with March showing significant outperformance. Although, we expected some traffic shift from the second quarter, given that Easter occurred in the final week of March, we are also happy with last-minute bookings. Our capacity reduction was less-than-expected at around minus 13% instead of the guided minus 16% to minus 18%. This was because Airbus delivered two new A321 neos earlier-than-planned. Additionally, high aircraft utilization also boosted ASMs per departure for the quarter. This additional capacity enabled us to meet demand and dilute fixed costs. Regarding network breakdown, ASMs were 27% lower in the domestic market and we increased capacity by 17% in the international market, resulting in a network-wide ASM decline of minus 13%. Taking advantage of the restoration of FAA Category 1, we continue to reallocate capacity to northbound routes, which are undergoing a maturity process in preparation for the peak summer season, while simultaneously rightsizing our domestic core markets. Therefore, the international load factor dropped four points to 82% and the domestic markets load factor was strong at 91%, up six points over the prior year period for a healthy load factor result of 87% for the overall network. During the remainder of 2024, we will be cautious and will not introduce too much capacity to any individual route. While the earlier-than-expected arrival of the two A321 neos provides incremental ASMs for the full year, we still expect a capacity reduction of 16% to 18% for 2024 and we are trending toward the upper end of that range. We are closer to minus 16% change versus 2023. Meanwhile, we continue to redeploy significant capacity into the U.S. market and we expect it will constitute around 45% of our network this year, compared to roughly 30% historically. We are currently in ramp up phase of much of this additional capacity, but continue to see progress in attractive markets like Los Angeles, the Bay Area, Chicago and Texas. In Central America, we are reducing the number of aircraft allocated to the market from nine to six due to our lack of aircraft availability. TRASM improved to 9.3% up 21%. This result was primarily driven by a focus on serving the most profitable routes in the domestic market, reducing capacity in underperforming routes and by robust growth in ancillary. International TRASM remained solid despite a 17% capacity increase. As customers increasingly embrace the Volaris Ultra Low-Cost Model, they are more frequently purchasing ancillary services. Total ancillaries per pack rose to a historically high record of $57 from the previous record of $55 for the fourth quarter of 2023. In the first quarter, ancillary revenues represented 51% of total operating revenues, inline with our goal of having them represent half of total operating revenues. These ancillary purchasing patterns are promising, as we simultaneously see strong base fare trends. Our average base fare stood at $54, reflecting a 15% increase. On recurring revenue, our goal is to build V Club membership to compose about a third of our total sales in the medium-term. Additionally, in the near-term, we expect to promote greater affinity with our core customers, as we refine the Volaris mobile app and other digital assets, which will catalyze higher direct sales, better product customization, booking flexibility and more options for our customers. Passenger satisfaction is crucial to our success. Volaris achieved a net promoter score of 32% in the first quarter, a positive result despite recent engine-related route reductions and cancellations. Our customer service team is working hard to communicate with passengers and reschedule bookings, while our operation team is performing well under the circumstances. On time performance for the quarter was 82.8% with a scheduled completion of 99.3% and utilization of 5.2 segments per aircraft per day. I want to reiterate our focus on good labor relations. We successfully agreed the 2024 Union Agreement, a key enabler of widening our cost advantage versus North American U.S. cities and legacy U.S. airlines. Maintaining strong labor relations and a stable work force, even during periods of industry disruption is essential to our operations and financial strategy and positioning our business for long-term growth. Looking forward, we have noted the reduced demand for April as Easter was celebrated in the first quarter. That said, we are observing healthy spring and summer booking trends. We are closely monitoring pricing and load factors to optimize yield. Our forecast indicates a further increase in second quarter bookings, as we enter the peak season. It is important to note that, while we are experiencing strong demand and positive travel trends, particularly in the domestic market, we are also navigating the challenges caused by the accelerated engine inspection process, while managing our capacity. In summary, we are well positioned for a positive 2024, driven by cost discipline, improved TRASM through better fares, strong ancillary performance, increased loads and our robust network. This upward trajectory, which started in the fourth quarter of 2023, is already evident. Booking (NASDAQ: BKNG ) trends indicate continued favorable performance in the months ahead, aligning with our 2024 guidance. I will now turn the call over to Jaime to discuss our financial performance.

Jaime Esteban Pous Fernandez: Thank you, Holger. Positive TRASM trends and strict cost control define our first quarter 2024 financial results. When combined with solid traffic, Pratt & Whitney compensation and diligent execution, we generated net profitability in the quarter. This is a notable accomplishment for the first quarter, as historically first quarters due to seasonality have resulted in net loss. This first quarter results encourage us to revise upward our full-year 2024 guidance. However, our execution plan for the year remains aligned with our initial outlook. I will provide a more detailed discussion of our updated guidance shortly. Let me start by walking through our performance in the first quarter of 2024, compared to the same period last year. Total operating revenues were $768 million, a 5% increase notwithstanding the 13% year-over-year reduction in capacity, due to the strong demand and total revenue per packs improvement. CASM-ex fuel result came in better than guidance at $0.0516 an increase of 11% against the first quarter of last year. The improvement was driven by the remeasurement of previously-booked redelivery accruals, which reflect nine lease extensions for aircraft for yearly due for delivery in 2025 and 2026. Nonetheless, as discussed in our previous call, there was substantial cost pressure from the engine-related AOEs and the effect of a larger proportion of international capacity, particularly with higher landing and navigation fees in the United States. We booked sale on leaseback gains of $9.7 million in the other operating income line and the remeasurement related to lease extensions generated a $41 million benefit in the aircraft variable lease expenses line. Meanwhile, total CASM was relatively flat year-over-year at $8.08 due to lower fuel expenses in the period. Our average economic fuel cost fell by 13% to $3.01 per gallon. EBIT totaled $104 million compared to a $31 million loss in the first quarter of 2023. This reflected a stronger CRASM, the benefit from aircraft lease extensions and lower fuel costs, resulting in a margin of 14%, an 18% percentage point increase. EBITDA totaled $235 million, a 91% increase while EBITDA margin was 31%, an improvement of 13% percentage points. It is important to note that, both EBIT and EBITDAR include price compensation as well as expense from leases of the entire fleet including aircraft on ground. Net income rose year-over-year to $33 million, translating into earnings per ADS of $0.29. The cash flow provided by operating activities in the Q1 was $245 million. The cash outflows used in investing and financing activities were $97 million and $171 million respectively. In the first quarter, our CapEx excluding fleet per delivery payments totaled $83 million primarily driven by acquiring additional spare engines. These investments are crucial for maintaining business continuity and minimizing disruption to our core operations. As a result, we now expect capital expenditures to be $400 million for full year 2024 versus an original CapEx forecast of $300 million. Volaris ended the quarter with a total liquidity position of $768 million, representing 23% of the last 12 months total operating revenues. Our net debt-to-EBITDA ratio decreased to 3.1 times from 3.8 times at the end of the first quarter of 2023 and 3.3 times at year end of 2023. We expect to further deleverage by the end of the year. Volaris has low and manual refinancing exposures in the short to medium-term. Most of our financial debts short-term maturities are associated with pre-delivery payments thus not posing a refinancing risk, given that we have already signed signal leasebacks for the aircraft that will be delivered over the next 18 months. We continue to be conservative with our balance sheet. As of March 31st, our fleet consisted of 134 aircraft, up from 129 aircraft at the end of the year. Fleet per departure were 197 and our fleet had an average age of 5.9 years. We confirm our medium-term aircraft deliveries scheduled with Airbus and expect 21 additional aircraft deliveries by the end of 2025 all with PDP financing and single leaseback commitments. Turning now to guidance, we are pleased with our first quarter results and market trends continue encouraging. However, industry conditions remain fluid. While we acknowledge macroeconomic and geopolitical uncertainties, we are cautiously optimistic about the year. For the second quarter of 2024, we expect an ASM reduction of approximately 18% year-over-year, TRASM of $9.1 to $9.2 CASM-ex to be fuel to range of $5.5 to $5.6. Please note that primary cost of the CASM-ex fuel increase is the capacity reduction and the specific fixed cost linked to the grounded fleet, which are not fully compensated by Pratt & Whitney. Finally, we expect an EBITDA margin between 31% and 33%. For the full year 2024, our latest guidance is as follows. We continue to expect an ASM reduction of 16% to 18% year-over-year, EBITDA margin in the range of 32% to 34%, compared to our initial outlook of 31% to 33%, given enhanced profitability in the first quarter. CapEx net of finance fleet delivery payments of $400 million, driven by our purchases of spare engines. Our second quarter and full year 2024 outlook assumes an average exchange rate of 17.30 to 17.50 Mexican peso per US dollar and an average U.S. Gulf Coast jet fuel price of $2.60 to $2.70 per gallon. We will continue to make decision appropriate to increase profitability, preserve business continuity and create shareholder value. Now I will turn the call back to Enrique for closing remarks.

Enrique Javier Beltranena Mejicano: Thank you, Jaime. In sum, we will continue to execute and deliver on every facet of our plan as we move through 2024. We will remain flexible adjusting for volatility and capitalizing on opportunities as necessary to drive profitability. Before proceeding to the Q&A session, I'd like to highlight the upcoming significant political campaign in Mexico over the next few months. While we anticipate minimal changes to aviation policies, the primary uncertainty will revolve around the development of aviation policies for managing metropolitan area airports. Thank you very much for listening. Operator, please open the line for questions.

Operator: Thank you. [Operator Instructions]. Our first question will come from Duane Pfennigwerth of Evercore ISI. Your line is open.

Duane Pfennigwerth: Hi, thank you. Good morning. On GTF, I wonder have you gotten any engines back yet? How did those turn times compare with your expectations? Are you seeing parts being prioritized for grounded aircraft versus new deliveries? Can you just elaborate on spare engine availability? Was this availability that came up as a function of your negotiations and hence the higher CapEx?

Jaime Esteban Pous Fernandez: Yes. Duane, good morning. We continue seeing progress, and as RTX reported this morning, they are probably in the highest peak of engines in terms of maintenance because obviously the -- was issued in January and basically all these engines are removed now and in the process of being repaired. The issue here is, A, how fast are inducting the engines into shops, A. And B, once they are in shop, are they really being inducted or they stay from patio waiting for spare parts and materials. The reason we are skeptical, A, on the turnaround times and B, in the speed that they can process this is because we have not seen, A, the inductions at the level they have promised and B, that they really start working on the engines once they have them in the shops. We have not received any powder metal engine back from the shops. I mean, we have received other engines that were repaired for all the reasons. Their turnaround time has been about 310 days, and I think that's it. That's all you asked, which was a lot.

Duane Pfennigwerth: Yes. Sorry for the multi-part question there. But I guess when would you expect for the engines that went in for this specific issue, is it basically a year from January, so early 2025 when you will begin to kind of measure that turn time or is it sooner?

Jaime Esteban Pous Fernandez: I think we're talking now more or less about 350 days or a little bit more. We delivered the first nine engines before September 15th. We think it's going to be somewhere in the fourth quarter of this year.

Duane Pfennigwerth: Okay, great. And then just maybe an easier one, how should we be thinking about the Easter shift impact? I know that can be more of an elongated peak leisure demand period in Mexico. How do you think about the Easter shift impact to the March quarter and to the June quarter?

Holger Blankenstein: This is Holger, Duane. Good morning. Clearly, the Easter shift helped the first quarter. We saw a great TRASM versus other quarters in previous years. There was one week of the Easter high season that fell into the March quarter and one into the June quarter. We're going to see in April partially also good results on TRASM and then the June quarter will have some effect and we are currently guiding to $9.2 on the June quarter in terms of TRASM.

Duane Pfennigwerth: Okay. Thank you, very much.

Operator: One moment for our next question. Our next question will be coming from Stephen Trent (NS: TREN ) of Citi. Stephen, your line is open.

Stephen Trent: Good morning, everyone. Thanks very much for taking my question. Can you hear me okay, by the way? Hello?

Holger Blankenstein: Yes, we can hear you perfectly.

Stephen Trent: Great. Thank you for that. Phone is actually a little funny here. Just a question about, how very strong you guys have been on the unit revenue side. I've gotten client inbounds looking at you guys and wondering why some of your competitors are floundering in Latin America. Is it fair to say that, one, some of those competitors are more focused on beach destinations and you're not? And two, you guys are generating a lot more revenue outside of basic economy versus some of your competitors? I just wanted to make sure I'm thinking about that fairly and sorry for my phone.

Holger Blankenstein: Clearly, a couple of things. This is Holger, by the way, Stephen. Good morning. A couple of things explain the in the first quarter. First and foremost, obviously, we had a significant decrease in capacity across the entire domestic market because of the Pratt & Whitney roundings. And also, you might recall that Aeromexico had some issues with the Boeing 737 MAX in January, which led to a capacity shrinkage in the domestic market and that clearly helped. We trimmed our network focusing on the least profitable markets and that helped push unit revenue. Second, I would characterize the market as quite rational, both in capacity and pricing in domestic market and also in our international routes. We've been working very diligently on generating or taking advantage of this capacity reduction and generating good loads, good fares and good ancillaries. The shift towards the international markets and the capacity expansion we did in the international market clearly helped our ancillary revenue performance and unit revenue. And then we already discussed this, Stephen, the fourth element here is, clearly the peak holy season Easter week, which occurred in the first quarter, which is not typical that has fallen to the first quarter. I think all these factors combined led to our strong transient performance in the first quarter.

Stephen Trent: Great. I appreciate that Holger. And just a very quick follow-up. I believe you guys mentioned $57 per passenger in ancillary revenue. Broadly thinking and as we look down the line a year or two from now, could we conceivably see some upside on that number, assuming FX neutrality between now and then?

Holger Blankenstein: Yes. Clearly, we are continuously executing our ancillary strategy. We believe that there is upside driven also by a shift to international markets and the high ancillary per passenger that international passengers buy. But we're also executing on other things, new products, better pricing, better personalization, more recurring revenue streams. Yes, we believe there is upside in ancillary per passenger.

Operator: Our next question will be coming from Michael Linenberg of Deutsche Bank (ETR: DBKGn ). Your line is open, Michael.

Michael Linenberg: Good morning, everyone. Just a quick question here. Jaime, you may have said the number. What are the number of aircraft that are now grounded due to the GTF issue? Where does that number peak out for the year?

Jaime Esteban Pous Fernandez: Hi, Michael. This is Jaime. The average number of aircraft that we had grounded during the first quarter was 29, Michael. I think the peak we are going to experience the peak in the third Q and the beginning of the third Q for this year.

Michael Linenberg: How much will be in third Q?

Jaime Esteban Pous Fernandez: The peak is going to be on the 3Q and the 4Q. Michael, I think you better see these because there are engines coming up and coming down. Think about reduction in ASMs instead of aircraft on ground. We will be provided the average planes at the end of each quarter, but consider that guidance of reducing 16% to 18% capacity, the flight forward of engines that we expect to be AOG during the year.

Michael Linenberg: Okay. My second question is, when we look at the operating gain that other operating expense or credit that you took in the quarter, how many airplanes or engines are underlying that? This is more of a modeling question. How does that number -- what does that number look as we move through the year? Is that the high it seems like that would be the high point and that number would come down dramatically based on your deliveries for the year. Is that right?

Jaime Esteban Pous Fernandez: Okay. I'm going to talk about two lines, Michael. First, on the other operating income line, remember what we are including in that line is single leaseback gains. This quarter reflects three the single leasebacks gains of three A321 neos and also flight compensation. When you move to variable lease expenses, which are basically re-deliveries, there is where we have a one-time effect that we for the re-deliveries extensions of the 2025 aircraft and one 2026 aircraft that is going to come back to the normal number of that. We had also that benefit in the 4Q. But going forward, since we are not expecting to make decisions on extending any more aircrafts, it should be stabilized to historically numbers, Michael.

Michael Linenberg: Okay. That's helpful then. Thank you.

Jaime Esteban Pous Fernandez: Michael, if I may. I think it's important to give some color to this whole thing in fact. I mean, the first thing is a quarter, which I think it's a spectacular in terms of TRASM because Pratt doesn't compensate those anything on revenues, okay. I think that's really important to be considered. The performance there at the revenue line is real and very, very driven by the market capacity and the way we are managing our TRASM factors. The second point, which is really important is, despite we did really well on the revenue on the CASM things are going to get more and more complicated exactly because of what you're asking. Towards the third quarter, we have the largest amount of engines in repair. It is important that I don't want you guys to get bullish with the results of the first quarter, because we remain skeptical on what is coming in terms of engines during the next couple of quarters.

Operator: Our next question will be coming from Rogerio Araujo of Bank of America (NYSE: BAC ). Your line is open.

Rogerio Araujo: Yes. Hi, guys. Thanks very much for the opportunity. Congratulations on the strong results. A couple here on my side. First, is there any way we can think about the net impact of the engine recall? What I mean is, if we take into consideration the compensation this quarter, but also these economies of scale that Volaris is facing and the higher TRASM that the lower flight frequencies are giving you, is this positive or negative to EBITDA and margins in your view? Anything you can -- any color you can give on that would be extremely helpful. The idea here is to think how recurring these stronger margins are for upcoming years. Thank you.

Jaime Esteban Pous Fernandez: Hi, Rogerio. This is Jaime. I will say that, you should think, that this quarter was really everything about TRASM. Pratt compensation doesn't compensate for revenue loss. We've got 29 aircraft on ground and we were able to fully compensate the revenue loss of those aircraft by our own and our work and network and not the strategies that Enrique and Holger has been talking about since the last quarter. What the only thing that is helping is TRASM, because basically I'm getting compensated for the rents of the fleet that are grounded. But I'm not getting fully compensated for all of the direct cost from the grounded fleet. I think in general, the plant situation is negative for the entire business and basically, we are having a plant in order to mitigate the consequences of it.

Unidentified Company Representative: I think if I want to add some color to that, I think the TRASM improvement will continue as much as everybody continues being careful with the capacity that they inject into the market, especially once the capacity is starting to come back. We, in Volaris, are absolutely careful and very, very detailed in the way we will re-assume the capacity into the market and we don't want to create a problem, A, on capacity or B, on pricing.

Rogerio Araujo: This is very clear and helpful. Thank you. Another very quick question here is on this extension of aircraft lease contracts. This has been supporting the variable lease expenses line in the past couple of quarters. Should we expect further positive impacts in coming quarters or that was it? Thank you.

Jaime Esteban Pous Fernandez: You should not expect that, Rogerio.

Rogerio Araujo: Okay, perfect. Thank you very much.

Operator: One moment for our next question. Our next question will be coming from Helane Becker of TD Cowen. Your line is open. Again, Helane Becker of TD Cowen. Your line is open.

Operator: Our next question will be coming from Guilherme Mendes of JPMorgan (NYSE: JPM ). Your line is open.

Guilherme Mendes: Good morning. Good afternoon everyone. Holger, Jaime, Ricardo, thanks for taking my question. I have a follow-up question on the competitive...

Unidentified Company Representative: Can you speak up? We barely hear you.

Guilherme Mendes: Fair now. Hello?

Unidentified Company Representative: Yes, go ahead.

Guilherme Mendes: Okay. Sorry, can you hear me better now?

Unidentified Company Representative: Yes.

Guilherme Mendes: Sorry about that. My question is on the Holger's point about competitors adding capacity in a conservative way. How overall have you been seeing the competitive environment in Mexico? Assuming that Viva will start to ground more capacity more towards the second half of the year. Do you see some kind of pressure at some point in time or the best case is for all the competitors to continue to be rational? Thank you.

Unidentified Company Representative: As I mentioned earlier, this is Holger. Good morning. We are currently seeing a pretty rational environment in the domestic market with rational capacity allocation into the key markets, a reduction of capacity in Mexico City International Airport due to the slot situation and a good pricing environment. We are also adding more capacity and shifting capacity from the domestic market to the international market, capacity ramp up, which should ramp up fully towards the high season of June, July and we are cautiously optimistic about that capacity getting to its full potential this year. As you might recall, we have shifted 17% of the capacity to the U.S. markets in the first quarter. [Technical difficulty]

Operator: I'm detecting no audio moving forward. Our next question will be a follow-up from Helane Becker, TD Cowen. Your line is open.

Helane Becker: Hi. Thanks very much, operator. Can you hear me now?

Unidentified Company Representative: Yes, we can, Helane. Good morning.

Helane Becker: Good morning. Sorry, I don't really know what happened there. But thanks for the time. Here's my question. In terms of looking ahead to the second half of the year, as you think about aircraft on the ground, how are you thinking about capacity and new aircraft coming in? I mean, I know you took two in the quarter that just ended, but have you been -- has Airbus talked to you about when the next set of aircraft will come in?

Jaime Esteban Pous Fernandez: Hi, Helane. This is Jaime. We have still from the Airbus purchase order a total of 10 additional aircraft to be delivered during 2024. So far, we expect that, aircraft are going to be delivered within a month in advance or a month in delay with what Airbus is telling us and that's included in the ASM guidance for the year that we have. It includes what we expect to be coming out because of the engines and new aircraft mitigation plan extensions and those all baking in the ASM capacity guidance of 16% to 18% reduction during the year, Helane.

Helane Becker: That's very helpful. Thank you. Just on the cash balances is, I think, 23% of LTM revenue, I want to say, I thought I read somewhere. What's your goal for that? I think in the past, it was as high as 30% plus. Where is your sweet spot for that?

Jaime Esteban Pous Fernandez: Our goal, Helane, is to maintain within 25% and 30%. Right now, because of what happened in particular in the third Q last year and AOGs, we had some impact on last year. But ideally, our goal and our budget is to maintain in between 25% and 30%.

Operator: One moment for our next question. Our next question will be coming from Fernanda [indiscernible] of BTG. Your line is open.

Unidentified Analyst: Hi. Thank you for taking my question and congrats on the results. Two questions on our end. The first is, we've heard some rumors about a possible category one downgrade from FAA. Just wanted to hear your most updated view on this matter. Second, given the volatility in oil and effect that we are seeing, just wondering how we should think about your head strategy on both things going forward. Thank you.

Jaime Esteban Pous Fernandez: Hi, Fernanda. This is Jaime. We have not heard the rumor and we don't have any indication and that a new downgrade will take place for Mexico. You can take that away from your mind. In particular with hedging, we don't have any hedging for fuel or FX. We don't plan to do it for the first of the year. Very important in terms of FX to consider that, we have a natural hedge and we have an important positive revenue coming in U.S. dollars across all of our cash is 90% invested in dollars.

Unidentified Analyst: Perfect. Thank you, very much. Have a nice day.

Operator: Thank you. This concludes today's question-and-answer session. I would now like to invite Mr. Beltranena to proceed with closing remarks. Please go ahead.

Enrique Javier Beltranena Mejicano: I just wanted to day, thank you everybody for being in the call and for your very interesting questions. I think that again, it was a quarter, which was driven by execution. I think, again, I want to remind everybody the effort we did at the revenue line. As always, I would like to thank you, our family of ambassadors, the Board of Directors, your investors, bankers, resource and suppliers for their commitment and support. I look forward to addressing you all again on the next call and I will be visiting New York, Boston, and Chicago in the next quarter, so I might see everybody there.

Operator: This concludes the Volaris conference call for today. Thank you very much for your participation and have a nice day.

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