Airline Embraces Fuel-Efficient NEO Aircraft And Digital Innovation Ahead

Key Takeaways

• Strategic fleet management and fuel-efficient aircraft integration are expected to lower costs and improve competitive positioning for Volaris by 2030.
  
• Focus on digital innovation and revenue diversification via ancillaries is set to enhance customer loyalty and stabilize revenue streams.
  
• Fleet availability issues, foreign exchange fluctuations, and U.S. border policy uncertainty may impact earnings and profitability for Volaris due to increased costs and reduced demand.

Catalysts

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

• Volaris has renegotiated its aircraft delivery schedule with Airbus to strategically stagger arrivals through 2031. This will allow the company to integrate new aircraft into operations without overextending capacity, potentially leading to improved unit cost control and competitive positioning. This is likely to impact future revenue and fleet ownership costs.
  
• The introduction of more fuel-efficient aircraft is set to deliver improved fuel efficiency and higher seat capacity. As much as 90% of Volaris’ fleet is expected to consist of NEO technology by 2030. This strategic shift should help structurally reduce fleet ownership costs and support margin improvement.
  
• Volaris is enhancing its revenue diversification through ancillary services, which now account for more than 50% of total revenue. Continued strong growth in non-ticket revenues, such as ancillaries, is likely to positively impact earnings and help sustain the revenue stream even when traditional ticket sales are volatile.
  
• Volaris is focused on enhancing its digital platforms and customer engagement by launching a new mobile app and improving direct channel sales. This focus on digital innovation is expected to bolster customer loyalty, increase ancillary sales, and improve customer experience, ultimately supporting earnings growth.
  
• The planned growth in available seat miles (ASMs) by around 13% in 2025, driven by engine returns and strategic capacity deployment, positions Volaris to capture market opportunities while managing operational challenges. This ASM growth, alongside route network optimization, will likely drive future revenue increases.

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 8.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.0% today to 6.8% in 3 years time.
• Analysts expect earnings to reach $273.4 million (and earnings per share of $0.25) by about April 2028, up from $126.0 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 8.6x on those 2028 earnings, up from 4.2x today. This future PE is greater than the current PE for the US Airlines industry at 4.2x.
• 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

• Continued engine inspections and aircraft groundings due to issues with Pratt & Whitney engines may affect Volaris' fleet availability, potentially reducing revenue capacity and negatively impacting net margins.
  
• Prolonged U.S. border policy uncertainty might deter demand for U.S.-Mexico travel, which could suppress passenger numbers and reduce earnings.
  
• Adverse foreign exchange fluctuations, notably the depreciation of the Mexican peso against the U.S. dollar, could increase operational costs and squeeze net margins.
  
• Renegotiations on aircraft deliveries due to supply chain challenges might lead to capacity imbalances and increased lease expenses, thereby affecting earnings.
  
• Ongoing compensation-related pressures from aircraft inspections and returns might incur significant one-off costs, negatively impacting net margins and overall profitability.

Valuation

• The analysts have a consensus price target of MX$22.182 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$25.0, and the most bearish reporting a price target of just MX$19.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $4.0 billion, earnings will come to $273.4 million, and it would be trading on a PE ratio of 8.6x, assuming you use a discount rate of 22.0%.
• Given the current share price of MX$9.0, the analyst price target of MX$22.18 is 59.4% 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.