Airline Will Capture VFR Traffic And Tech For Future Connectivity

Key Takeaways

• Strategic focus on VFR traffic and geopolitical adaptability positions Volaris for stable revenue growth and margin protection.
  
• Ancillary revenues and technological advancements support profitability and enhance customer experience by optimizing sales channels and reducing costs.
  
• Geopolitical tensions and currency depreciation could pressure revenue growth and profitability, while demand uncertainties may result in limited capacity and increased maintenance costs.

Catalysts

Controladora Vuela Compañía de Aviación, S.A.B.

• Volaris is strategically capitalizing on VFR (Visiting Friends and Relatives) traffic, which is expected to grow as long-term travel behavior remains stable, potentially increasing load factors and supporting revenue growth.
  
• The airline's adaptation to geopolitical uncertainties, especially regarding U.S.-Mexico relations, and its agile capacity management ensure that Volaris can align with demand trends, protecting net margins through disciplined growth and cost control.
  
• Ancillary revenues play a crucial role in Volaris's strategy, comprising over 50% of total revenue and offering high-margin opportunities, which should support profitability despite fare pressures.
  
• Volaris's flexible fleet plan and strategic alliances, such as codesharing with Copa Airlines, allow it to optimize route efficiency and expand connectivity, which could lead to revenue growth in new and existing markets.
  
• The airline's focus on technological advancements, like the new Volaris app, enhances customer experience and strengthens direct sales channels, aiming to increase earnings by reducing third-party commissions and boosting ancillary sales.

Controladora Vuela Compañía de Aviación. de Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Controladora Vuela Compañía de Aviación. de's revenue will grow by 11.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.4% today to 4.4% in 3 years time.
• Analysts expect earnings to reach $183.8 million (and earnings per share of $-0.16) by about May 2028, up from $42.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.9x on those 2028 earnings, up from 10.0x today. This future PE is greater than the current PE for the US Airlines industry at 10.0x.
• Analysts expect the number of shares outstanding to decline by 0.15% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 21.96%, as per the Simply Wall St company report.

Controladora Vuela Compañía de Aviación. de Future Earnings Per Share Growth

Risks

• Ongoing geopolitical volatility between the U.S. and Mexico, along with associated uncertainty around border policies and tariffs, may keep consumers cautious, potentially depressing booking volumes and thereby impacting revenue growth.
  
• A significant reduction in capacity growth from planned 13%-15% to 8%-9% to address demand fluctuations could limit revenue potential and profit margins, particularly if market conditions remain challenging.
  
• A 20% depreciation of the Mexican peso against the U.S. dollar has negatively impacted TRASM and could continue to do so, putting pressure on earnings if exchange rates do not stabilize or improve.
  
• Increased depreciation and redelivery costs, partly due to major maintenance events, have impacted financial results, as seen in a net loss in the first quarter. Such costs may continue to pressure net margins if maintenance expenses remain high.
  
• Weakening TRASM and fare pressure, compounded by low consumer confidence, could further erode profitability, especially if the anticipated demand recovery in the second half does not materialize as expected, putting earnings at risk.

Valuation

• The analysts have a consensus price target of MX$22.338 for Controladora Vuela Compañía de Aviación. de based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of MX$25.6, and the most bearish reporting a price target of just MX$19.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $4.2 billion, earnings will come to $183.8 million, and it would be trading on a PE ratio of 12.9x, assuming you use a discount rate of 22.0%.
  
• Given the current share price of MX$7.15, the analyst price target of MX$22.34 is 68.0% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.