ANALYSIS: Volaris launches IPO in hunger for growth

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Mexican ultra low-cost carrier Volaris filed for an initial public offering (IPO) late last week in a move that was met with little fanfare, but signals the six-year-old carrier's appetite for growth in a market that has undergone substantial changes in recent years.

The airline began operations in 2006 with a fleet of five Airbus A320 family aircraft, but has grown rapidly since then and is now the second top carrier in Mexico's domestic market with a 23% market share.

It now hopes to raise up to $100 million in its IPO through both a Mexican and international offering in the form of American depository receipts, and plans to list on both the Mexican and New York stock exchanges. No share pricing details are available yet.

Volaris aims to use the IPO proceeds to pre-pay principal and interest of existing loans, as well as to fund pre-delivery payments of aircraft, it says in its prospectus filed with US Securities and Exchange Commission.

The IPO filing caps off recent years of aggressive expansion for Volaris, one of a few Mexican carriers that benefitted from the demise of Mexicana and other Mexican carriers in the years since Volaris launched flights.

"Since we introduced our ULCC [ultra low-cost carrier] business model in 2006, eight airlines have gone out of business in Mexico, including Grupo Mexicana, which ceased operations in 2010," notes Volaris in its filing.

Indeed, Mexicana's demise in particular has proven to be especially strategic for Volaris. Mexicana had held the lion's share of the international air traffic market out of Mexico before it ceased operations in August 2010, and this was obvious in the severe 42% year-on-year fall in international traffic in September 2010, the first month after Mexicana exited the market.

With Mexicana no longer able to operate its flights, US and Mexican regulators granted its route authorities to the remaining Mexican carriers, namely Aeromexico, Volaris and Interjet. Volaris says it took over 15 routes that were mostly operated by Mexicana before it entered bankruptcy protection. Among these are six routes connecting Mexico City International airport with US cities.

Volaris route map

Source: Innovata Flightmaps Analytics 

The carrier flies to 30 domestic destinations and has a substantial presence in the transborder market - it operates to 10 US cities non-stop, almost as many as the 11 of Aeromexico, Mexico's largest carrier. Its flights to the USA contribute about a quarter of Volaris' passenger revenues, it says.

Volaris says the 10 US cities in its network are home to some of the most populous Mexican communities, which it believes helps drive demand for its flights targetted at the cost-conscious visiting friends and relative (VFR) passenger.

The airline has styled itself as an ultra low-cost carrier, albeit with a focus on high quality customer service. It emphasises low base fares as a strategy to stimulate demand, and says its lowest fares are priced to compete with long-distance bus fares in Mexico. This is as the carrier targets "executive and luxury bus passengers" who travel for more than five hours.

"We have been able to successfully stimulate demand for our services among long-distance bus passengers by offering fares that are low enough to make it economical for these passengers to switch from bus to air travel. There is a large bus industry in Mexico, with total passenger segments of approximately 2.8 billion in 2012, of which approximately 74.4 million were executive and luxury passenger segments," says Volaris, citing Mexican government transportation figures.

It appears that Volaris' strategy is paying off so far. It reported a full-year operating profit of Ps378 million ($29.3 million) in 2012, and full-year revenues of Ps11.7 billion.

The airline expects that passenger traffic in the cost-conscious segment it is targetting will grow further. Citing the expected 3.5% forecasted growth in Mexico's GDP for 2013, Volaris says it expects more middle-income Mexicans to travel.

"We believe that the Mexican air transportation industry still remains under-developed... substantial investments made in airport infrastructure in Mexico over the last ten years will help to sustain this expected growth," says Volaris.

Volaris' cost per available seat mile (CASM) of Ps1.23 is the lowest among publicly traded carriers in Latin America, it points out. "We have achieved this through our efficient and uniform fleet, high asset utilisation, our emphasis on direct sales and distribution and our variable, performance-based compensation structure," it says.

The airline expects to lower its CASM further as it deploys additional A320s equipped with fuel-saving sharklets. It operates 43 A320 family aircraft as of end March, and has firm commitments for 49 sharklet-equipped A320s that will be delivered over the next eight years. Thirty of these 49 aircraft will be A320neos. Volaris has secured financing for pre-delivery payments for the A320 deliveries through December 2014.

Looking further ahead, the airline aims to operate an all-A320 fleet in 2020. As of end March, its fleet of 43 A320 family aircraft comprised 24 A319s and 19 A320s. It will take delivery of another three A320s by end-2013.

Volaris' A320s are configured with 174 passenger seats each, 21% more than the 144 seats on the A319s.