Biggest Gainer in Mexico Is Using Cheap Airfares to Fuel Growth

  • Volaris adds routes, expands capacity with new jetliners
  • Target market includes millions of intercity bus passengers

The biggest Mexican airline by market value is surging again as it boosts capacity and uses discount prices to achieve the nation’s fastest passenger growth.

Volaris is posting this year’s biggest stock-market increase among major Mexican companies after doubling last year. Fourth-quarter profit that exceeded analysts’ estimates prompted Barclays Plc and Intercam Casa de Bolsa to raise their target prices last week, anticipating additional gains as the carrier adds routes and entices more passengers from intercity buses onto narrow-body jetliners.

“There’s still a lot of growth potential in profit margins and sales,” said Alejandra Marcos, deputy director of research at Intercam Casa de Bolsa in Mexico City. “Their business model is completely focused on being a low-cost airline targeting the segments of the population that aren’t well tended to or hadn’t been able to participate in Mexico’s aviation market.”

Volaris’ shares have risen 25 percent this year to a record 37.05 pesos on Wednesday. That’s the biggest increase in Mexico for companies with a market value of at least $1 billion.

Growing Sales

The airline has benefited from strong consumer spending in Mexico, which it has “actively stimulated with our low base fares and our bus switching campaign, while diversifying our network and growing our non-ticket revenues,” Chief Executive Officer Enrique Beltranena said on a conference call Feb. 22. He’s scheduled to meet with investors and analysts in New York on March 15.

The Mexico City-based carrier, which has an official name of Controladora Vuela Cia. de Aviacion SAB, declined to provide additional comment.

New aircraft deliveries and routes this year will translate into higher sales, said Jose Maria Flores, an analyst at Casa de Bolsa Ve Por Mas who recommends buying the shares.

The airline’s passengers rose 23 percent last year to 11.5 million, according to data compiled by the Mexican government. That was the fastest growth rate among major Mexican airlines and beat the average increase of 15 percent. When Volaris sold shares in 2013, it said it would target a bus industry that had 74 million passenger trips in its executive and luxury category.

Non-ticket revenue such as baggage fees and sales of on-board food and services also are becoming more important. On a per-passenger basis, they climbed 14 percent in the fourth quarter.

“We’re expecting sales growth of about 20 percent for the year,” Flores said.

Buyer Caution

The carrier’s stock-market gains are leading some analysts to recommend avoiding the shares. Helane Becker, an analyst at Cowen & Co., recently cut her rating to market perform from outperform, saying there are better potential returns elsewhere in the industry.

“Volaris is the most expensive airline in our coverage list,” Becker wrote in a Feb. 23 report. “Given the strong performance we see better value in the airline sector for new money.”

Volaris has little room to rise before attaining the average 12-month price target of four analysts surveyed by Bloomberg. Based on the same yardstick, Grupo Aeromexico SAB, the nation’s largest carrier by passengers, still has room for a 4 percent gain. The average price target for the American depositary receipts of Avianca Holdings SA, implies a potential return of 36 percent in the next year.

Modern Fleet

Volaris’ fleet of 56 aircraft is mostly made up of newer models, so the airline saves in maintenance costs and fuel. With an average aircraft age of less than five years, Volaris’s fleet is less than half as old as the median of 11.5 years for 15 carriers in North America and Latin America, according to data compiled by Bloomberg.

“Newer planes represent savings of up to 7 percent in fuel costs due to more aerodynamic wings,” Flores said. “Add to that newer and more efficient motors, and the savings become important.”

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