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Volaris Slumps as Aeromexico Answers Fare Cuts: Corporate Mexico

A Volaris jet taxis on the tarmac at Benito Juarez International Airport in Mexico City. Photographer: Susana Gonzalez/Bloomberg
A Volaris jet taxis on the tarmac at Benito Juarez International Airport in Mexico City. Photographer: Susana Gonzalez/Bloomberg

March 6 (Bloomberg) -- Volaris, Mexico’s second-largest airline, is posting the biggest decline among carriers in the Americas as the discounter becomes a target of its own price-cutting tactics.

Controladora Vuela Cia. de Aviacion SAB, as Volaris is formally known, fell 31 percent in 2014 before today, the most among 18 airlines with a market value of at least $500 million, data compiled by Bloomberg show. On March 3, the stock closed at the lowest since its Sept. 17 initial public offering.

Weighing on the shares are price reductions by low-cost rivals and by Grupo Aeromexico SAB, the biggest carrier, which is adding flights in Volaris strongholds such as Guadalajara and Tijuana and paring fares. Those counterattacks helped damp Volaris’s average fares by 17 percent in the fourth quarter, when the Mexico City-based airline posted a loss that may be followed by another in the first three months of this year.

“Competition has intensified a lot,” Javier Romo, a Signum Research analyst, said by telephone from Mexico City. “The economy hasn’t been strong, but Aeromexico did better than Volaris. What we’re worried about is the decline in fares.”

Aeromexico, which flies within the country and to long-haul destinations such as Europe and South America, isn’t ceding the local market where Volaris’s low-price formula helped the 8-year-old airline surpass the legacy carrier by domestic traffic. Interjet, the brand of ABC Aerolineas SA, has also been cutting some fares, said Romo, who lowered his rating on Volaris to hold from buy after its Feb. 25 earnings report.

International Growth

Volaris is responding by scaling back plans to expand flights in 2014, emphasizing international growth and signing a ticket-sales deal with an intercity bus operator, Chief Executive Officer Enrique Beltranena said. New jets arriving this year will help reduce costs for each seat flown a mile, an industry benchmark that was already down 7.3 percent in the fourth quarter after excluding fuel.

“We had a tough quarter and we may have another tough quarter in the first quarter,” Beltranena said in an interview in Mexico City. “From a structural perspective, the company is a better company than when we went public. The company now has a better defined ultra-low-cost model.”

That didn’t stop Brasil Plural, Cowen & Co., Evercore Partners Inc. and UBS AG from lowering their Volaris price targets last week. The airline lost 97.1 million pesos ($7.3 million) in the fourth quarter. Sales slid 1.1 percent after a 16 percent gain in the first nine months of the year.

New Routes

Michael Linenberg, a Deutsche Bank AG analyst, cut his Volaris recommendation to hold from buy, saying results would continue to be slowed by “a weaker-than-expected macro environment and intensified competition.”

“We believe that Volaris’ growth, which primarily focuses on new routes, is taking longer than expected to ramp up to sustainable profitability,” Linenberg wrote in a Feb. 25 report. He kept Aeromexico as a buy last month, saying cost cuts and sales gains would help the airline expand profit margins.

Volaris advanced 1.3 percent to 12.78 pesos at the close in Mexico City. Aeromexico rose 1.8 percent to 19.74 pesos, extending this year’s gain to 10 percent to beat the 8.3 percent decline for the benchmark IPC index.

Aeromexico flights in the Americas outside Mexico accounted for 71 percent of last year’s operating profit, according to a filing with the Mexican stock exchange. Mexico made up just 17 percent compared with 37 percent in 2012 as the carrier lowered prices on some domestic routes.

Aeromexico declined to comment through a spokesman.

Perk Up

Closely held Interjet is owned by the family of Miguel Aleman Velasco, son of former Mexican president Miguel Aleman Valdes. Grupo Viva Aerobus SAB, controlled by a founder of Ryanair Holdings Plc and a Mexican bus company called Inversionistas en Autotransportes Mexicanos SA, postponed an IPO last month after seeking to raise about $225 million.

Viva Aerobus had a “good end of the year” and its low costs give it “a more robust model to face any economic slowdown or competitive environment,’ Chief Executive Officer Juan Carlos Zuazua said in an e-mailed statement.

Interjet did not reply to requests by telephone and e-mail for comment.

While Volaris may lose money again in the first quarter, its performance will perk up during the rest of the year, according to Helane Becker, a Cowen analyst with an outperform recommendation on the airline. Earnings per share this year will probably surpass last year’s level, she said.

The average 12-month target price of the company’s American depositary receipts is $14, implying a 48 percent increase from yesterday’s close, according to six analyst estimates compiled by Bloomberg.

‘‘We believe the pricing environment will improve during 2014 as Volaris has cut capacity growth and the economy is expected to show improvement,” Becker said in a Feb. 26 report.

Economic Improvement

Price cuts by Volaris helped it gain market share as Mexico’s air passengers advanced to a record 61.5 million last year. The airline carried 23 percent of domestic passengers in 2013 compared with 20 percent the year before, according to data compiled by the Communications and Transportation Ministry.

Aeromexico’s market share at home slipped to 36 percent last year from 38 percent the previous year, while Interjet’s held steady at 24 percent and Viva Aerobus stayed at 12 percent.

Including international service, Volaris’s 8.48 million total passengers nosed ahead of Interjet’s 8.4 million and trailed Aeromexico’s 15.5 million, according to the Communications and Transportation Ministry. Luring bus passengers onto planes will bolster traffic, Beltranena said.

Volaris topped Aeromexico as the largest domestic carrier by traffic, the number of miles flown by paying passengers.

An improving economy should help low-cost carriers boost fares, according to Marco Montanez, an analyst with Vector Casa de Bolsa in Mexico City. Gross domestic product may expand 3.3 percent this year, three times as quickly as last year, according to economist estimates compiled by Bloomberg.

“The economy is a factor because price sensitivity is an important variable for the customers of low-cost airlines,” Montanez, who raised Aeromexico to buy from hold last month and doesn’t rate Volaris, said in a telephone interview. “Right now, the competition is voracious. Anyone who wants to play in the segment has to be very competitive in fares.”

To contact the reporter on this story: Brendan Case in Mexico City at bcase4@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net

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