Volaris Braces For A Tough 2020; Expects To Survive Pandemic

Mexico’s largest domestic airline Volaris has been forced to slash its capacity by 80% for April after the country’s government declared a health emergency to contain the coronavirus.  

The ULCC should weather the crisis, but the fallout from the pandemic will likely push Volaris into the red for 2020. 

The government has suspended non-essential activities in the public, private and social sector as well as issuing a stay at home order for Mexico’s population for the duration of the emergency order, which is scheduled to end on April 30. According to the Johns Hopkins Coronavirus Resource Center, Mexico’s COVID-19 cases increased from 367 on March 24 to 1,150 on April 3. 

As a result, Volaris is cutting its system capacity by 80% for the month of April. It’s significant drop for Volaris, which was Mexico’s largest domestic airline in 2019 measured by passengers carried with a 31% share. Data from CAPA and OAG show that roughly 72% of the airline’s capacity is deployed into Mexico’s domestic market. 

Volaris relies heavily on a bus switching strategy to stimulate demand and build a strong passenger base in the Mexican market. Previously, airline executives have stated that Volaris is uncontested in 41% of its routes, and its major competitors in those markets stem from bus transport. 

Volaris joins other airlines worldwide in facing financial headwinds as a result of the COVID-19 pandemic. Cowen & Co analyst Helane Becker has concluded that Volaris, along with Air Canada and Copa, will face loses in 2020 “and a recovery will take time.” For 2020, Cowen has lowered its forecasted earnings per share (EPS) targets for Volaris from $14 to $6. 

Cowen believes Mexico’s emergency health directive will drive significant declines in demand. However, Becker stated that “Volaris is also in the best financial shape relative to their competitors in Mexico.” 

At the end of 2019, Volaris’ net debt to EBITDAR was 3.5x, and its cash as a percentage of trailing 12 months operating revenue was 23%. At the end of 2019, Aeromexico, Mexico’s second largest domestic airline and the country’s only full-service carrier, has a net debt to EBITDAR of 3.6x, and its cash balances totaled approximately 13% of its total annual revenues. 

Cowen expects Mexico’s aviation market will emerge from the COVID-19 pandemic with fewer competitors, “but we expect Volaris to be a survivor,” Becker stated.