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spk00: Good morning, everyone. Thank you for standing by. Welcome to Velar's second quarter 2023 financial results conference call. All lines are in a listen-only mode. Following the company's presentation, we will open the call for your questions and answers. Please note that we are recording this event. This event is also being broadcast live via a webcast and may be accessed through the Velar's website. Those following the presentation via the webcast may post their questions on the platform. The management team will answer them during this call, or the Velars Investor Relations team will answer them after the conference is finished. To send your questions via the webcast platform, click on the Ask a Question button and type your inquiry. At this point, I would like to turn the call over to Ricardo Martinez, Investor Relations Director. Please go ahead, Ricardo.
spk09: Good morning, and thank you for joining the call. With us today are our President and CEO, Enrique Beltranena, our Airline Executive Vice President, Holger Blankestein, and our Chief Financial Officer, Jaime Post. They will be discussing the company's second quarter 2022 results. Afterward, we will move on to your questions. Please note that this call is for investors and analysts only. Before we begin, please remember that this call may include forward-looking statements within the meaning of applicable securities laws. Forward-looking statements are subject to several factors that could cause the company's results to differ materially from expectations. as described in the company's filings with the United States SEC and Mexico's CNBB. These statements speak only as of the date they are made, and Volaris undertakes no obligation to update or modify any forward-looking statement. As in our earnings per release, our numbers are in US dollars compared to the second quarter of 2022, unless otherwise noted. And with that, I will turn the call over to Enrique.
spk14: Thank you, Ricardo, and everyone for joining us today. During the quarter, our company's performance was aligned with our projected full-year outlook, supported by favorable macroeconomic conditions, including lower jet fuel costs and stronger Mexican pesos. We are seeing solid bookings for the summer months and remain confident in the resilience of our BFR passenger base in Mexico and the robust demand we see in Central America and the United States. We eagerly await the return of Mexico's Category 1 status and the growth in the domestic market resulting from the Mexico-U.S. near-shoring. So we would like to start by reiterating our revenue and EBITDA margin guidance for the year. We will continue to focus on delivering total operating revenue between $3.2 and $3.4 billion and an EBITDA margin of 21 to 31%, which is an increase of 8 to 10 percentage points versus 2022. During this last quarter, we moved capacity from the Mexican domestic market to our Central American Air Operator Certificates, or AOCs, alleviating the temporary overcapacity in Mexico and achieving a more balanced supply and demand. As a result, we consciously reduced a few points of market share in the domestic Mexican market to achieve higher network profitability. Throughout the second quarter, we maintained total revenue per passenger flat, taking advantage of strong ancillary revenue to offset domestic base fare reductions. Additionally, we maintained healthy low factors. The second quarter of 2023 featured hallmark progress for our ancillary strategy. Our ancillary revenues as a percentage of total revenues were 49% up from 40% in the second quarter of 2022 and 47% in the first quarter of 2023. The reduction of base fares showed the strength of our ultra-low-cost carrier model stimulating volume through lower base fares. The low factor remained healthy in the mid-80s as we managed pricing in the domestic market to drive volumes. Passengers have responded in kind, resulting in RPMs growing just ahead of ASMs year-to-date. International and pricing there remained robust, showcasing an exceptional response to our increased capacity in Central America for routes to the U.S. and Mexico. Our plan for the second half of this year includes incorporating additional capacity into this market, mainly to serve the growing VFR demand between Central America and the United States. Continuing with international year to date, we have an improvement of 6.5 percentage points on load factor, climbing from high 70s to mid 80s, giving strong demand in VFR markets in California, Texas and Chicago. International passengers during the semester grew 33.5% versus the same period in 2022. This quarter was focused on preparation for the future as we anticipate Mexico's imminent recovery of Category 1 status with the U.S. Our team has been proactive by planning to implement network changes in Mexico, Central America, and later in the year in the cross-border market to the U.S. These adjustments will enable us to relocate some of our growth towards a robust international market. Moving into our results from the quarter, ASMs grew 18% compared to the second quarter of 2022, including a 13% increase in the Mexican domestic market and a 30% increase in our international markets. Initially, we planned to return eight aircraft this year, but decided to extend leases for six of them. This decision will allow us to better handle any operational challenges related to engine availability and aircraft delivery delays during the peak summer and December holiday seasons. While year-to-date our ASM growth remains ahead of our 10% guidance for the entire year, this strength is attributable to our strategy of extending six aircraft air deliveries. As such, we now expect ASMs to grow around 13% in 2023, including the capacity we will deploy to the U.S. upon Category 1 recovery. Turning back to demand, TRASM for the second quarter was $7.92, a 3% increase compared to this year's first quarter and a 4% reduction compared to the second quarter of last year. Our overall low factor for the second quarter was 84.6%, down one percentage point year-on-year. April started with a healthy low factor of 85.8%, our second most robust result for that month in the past decade, even considering flat traffic for Holy Week, the week-long Catholic observance, and the Eastern Holy Day in the first week of the month. Load factors for May and June were sequentially softer at 84.5% and 83.3% respectively. However, we have identified certain temporary or one-off factors that influence this moderation. Late in May, local and social media circulated an anonymous unsigned letter warning of a potential strike and work stoppage by Volaris flight crews in June. This story provided further reverberations in the local press. In addition, the Mexican aviation industry has been dealing with its Category 2 downgrade from the FAA for over two years. While there are signs of regaining Category 1 status soon, the restoration process has been long and burdensome. Mexico's aviation authorities have stated that the government has completed all the necessary procedures and met the requirements set by the FAA. Once the U.S. authorities announce the upgrade, we are prepared to utilize the flexibility in our business model to redeploy approximately 5% of our total capacity to international markets in the fourth quarter. This strategic move will alleviate pressure on those markets while providing the much-needed capacity for U.S. routes. We will also reactivate other important strategic levers upon the return of Category 1. One of our top priorities is resuming the co-share agreement with Frontier, which will strengthen our network and provide enhanced travel options for our passengers. Another upside of the Category 1 restoration is the opportunity to utilize the 35 NEOs delivered to us since Mexico was downgraded. These aircraft are primarily allocated for domestic operations, meaning we are not fully capitalizing on their efficiencies. However, once Category 1 is reinstated, we can leverage these modern and fuel-efficient aircraft on longer routes. This strategic move will optimize fuel consumption and strengthen our competitive cost advantage. Moreover, it aligns with our commitment to sustainable travel. Regarding cost, our chasm for the second quarter was $7.40, making a notable 13% decrease compared to the same period of last year. This reduction is attributable to the stabilization of fuel costs from last year's high levels. Casmex fuel stood at $4.82 for the quarter, in line with our full-year expectations. This achievement was attained despite the strong appreciation of the Mexican peso, non-engine availability costs, and aircraft delivery delays. Moving now to our fleet growth plan, anchored around our outstanding 143 all-new aircraft order book, which includes 117 A321 aircraft. This order was established along with the Indigo Group in 2017. During the second quarter, we took delivery of our first aircraft. This is the start of an era, providing meaningful fleet cost ownership reduction and sets the stage for many benefits in the coming years, like low cost going lower, while our environmental impact will also be reduced. At this time, I would like to highlight significant recent commercial developments that speak to our growth strategies evolution in the future. We announced 40 new domestic routes in Mexico, 33 of which presently have no other air service. We launched our annual pass and all-you-can-fly annual membership program. We are now the only airline in Latin America with an offering of this nature. We founded Volaris to democratize flying and continue to pursue our mission of introducing bus riders to flying. To date, we have served over 10 million first-time flyers, many of whom travel with us again multiple times yearly. At Volaris, we prioritize both switching and loyal passengers, so we have partnered with OXO, the largest retailer in Mexico, for our affinity program. We have improved our ability to convert first-time passengers into loyal customers. Our low fares and new affinity program are crucial in growing and retaining our customer base. Our passengers repeatedly travel with us for a reason. During the second quarter, among all airlines in the year's first half, we registered the lowest complaint ratio at Profeco, Mexico's consumer protection agency, among all airlines in the year's first half. With this achievement, Volaris demonstrates its commitment to quality and customer experience. I'm glad to inform you that Volaris and Indigo Partners Frontier and Wizz Air announced an investment in CleanJewel, a U.S.-based startup focused on accelerating sustainable aviation fuel production. Likewise, in further support of our fleet plan and sustainability program, we announced the selection of Pratt & Whitney eco-efficient GTF engines for 64 Airbus A321neo family aircraft in June. This agreement also includes a long-term maintenance contract. Now, I will turn the call over to Holger to explain our market evolution and commercial innovations in greater detail. Please, Holger, go ahead.
spk02: Thank you, Enrique, and good morning. I am pleased to share that the second quarter of 2023 marked a period of continued robust international growth and an exciting announcement of new domestic routes to expand our network and bolster ancillary performance. Throughout this quarter, we have implemented various initiatives to enhance both the conversion of bus travelers to air passengers and increase passenger repetitiveness. Regarding our second quarter results, I would like to highlight that we achieved seven percentage points of the 18% capacity growth by driving superior utilization of our fleet, particularly on longer routes. We saw remarkable progress with a daily average of 909,000 available seat miles per aircraft per day, up from 835,000 in the same quarter last year. Additionally, we achieved 13.4 daily block hours. TRASM experienced a slight decrease in the second quarter due to reduced base fares on domestic routes, aiming to recover volumes. However, this impact was offset by solid ancillary performance. As a result, total revenue per passenger reached $93.4, higher than the $92.6 achieved in the second quarter of 2022. Total revenues per departure increased by 3%. While the overall load factor for the second quarter fell one percentage point year on year, the domestic market saw a 3.5 percentage point reduction, nearly offset by robust 4.9 percentage points growth, in the international market. Currently, we are facing a short-term excess of capacity and to address this, we have taken action to reduce capacity on domestic trunk routes. We are also reshuffling our domestic capacity to alleviate pressure on specific higher density routes and prepare for redeployment to the Central American market and the Mexico to US routes upon the recovery of Cat 1. Furthermore, we have encountered infrastructure constraints, particularly at Mexico City International Airport, where our slots have been reduced. However, in June, we announced 40 new domestic routes to connect underserved Mexican markets, aiming to alleviate this pressure and provide bus customers with a new alternative for travel. This expansion seeks to replicate our successful models in serving VFR and leisure traffic in Tijuana and our strong base in Guadalajara. Mexico's position as the largest trading partner to the U.S. and the emergence of nearshoring create a favorable economic environment with higher employment, better wages, increased consumer spending, and a stronger peso. With Volare's strategic network concentration in the northern and central parts of the country, we are well positioned to benefit from these trends and anticipate further growth and market presence in the medium term. All the newly introduced domestic routes began operating in the first week of July, and we are pleased with the early turnout in traffic and loads. In addition to our success in the domestic market, we continue to experience strong growth in Central America. Sales to U.S. routes in this region rose by 76% in June compared to last year's levels, and passenger volume increased by 32% in the first half of 2023. To capitalize on the growing demand, we have a strategic advantage with our two Central American AOCs. As part of our plan, we aim to allocate up to three additional aircraft to this region during the second half of the year, raising the total count to nine. Our competitors in Mexico lack alternative AOCs, leaving them with no other options to deploy additional capacity outside Mexico. So far this year, we have opened international routes from El Salvador to Houston, Miami, Oakland, Ontario in California, and Guatemala to Chicago. This brings us up to 24 routes operated by our Central American AOCs and more than 1 million passengers transported year to date. Turning our focus to ancillary revenue, we experienced remarkable adoption of our ancillary products in the second quarter. with our cutting-edge approach driving a 25% year-over-year increase and a 10% increase versus the first quarter of 2023, reaching a record of $46 per passenger. Ancillary revenue contributed over $9 per passenger more than in the second quarter of 2022. Ancillaries climbed to 49%, up 9.6 percentage points year-on-year as a proportion of our total operating revenues. These impressive results were achieved through innovative offerings, such as our V-Club membership program, which has seen a doubling in sales compared to the first quarter. Introducing the Annual Pass, a membership that provides unlimited flights for a yearly fee, will allow us to enhance our load factors for last-minute bookings and sell distressed inventory effectively. The annual pass provides customers with convenient and flexible travel options while maximizing the utilization of available seats on our flights. We will continue to develop our Yavas travel packaging program to further contribute to ancillary growth. Additionally, our affinity program through OXO partners has launched, making it one of the most extensive programs in Latin America. This program aims to attract more first-time flyers and incentivize repeat passengers, a trend that we have observed increasing. Looking ahead, we are optimistic about our solid bookings for the summer months, supported by attractive low fares in our domestic markets. We anticipate TRASM improvement year over year for the second half of the year. In conclusion, we remain confident in the resilience of our VFR passenger base in Mexico at the same time we will continue to experience robust demand in Central America and the United States. we eagerly await the return of Mexico's Category 1 status and are well prepared to seize the opportunities it will bring. For the second half of the year, the seasonally stronger semester, we are looking forward to several top-line tailwinds, including solid booking curves, stable international affairs, a return of Cat 1, strong Central American growth, and more solid domestic network and a ramp up of ancillary projects all contributing to lifting ancillary revenues towards 50 of total operating revenues i will now pass the call over to jaime to discuss our financial performance for the quarter thank you thanks holder
spk03: In the second quarter of 2023, Volaris posted a 27.1% EBITDA margin, an improvement of 11.5 percentage points. During the quarter, fuel costs normalized from last year's spike, and we are not forecasting disruptions in the jet fuel market for the remainder of 2023, with only seasonality driving movements in price levels. For the full year, we now expect Gulf Coast jet fuel prices in the range of $2.55 to $2.65 per gallon versus a range of $3 to $3.10 in our original outlook. EVTAR for the quarter totaled $212 million, nearly double the prior year. we maintain our full year EBITDA margin guidance in the 29% to 31% range. EBIT, total $51 million, with an EBIT margin of 6.5%, up from a negative 2.8% in the second quarter of 2022. Net income was $6 million, translating to earnings per ADS of $0.05 cents. Total operating revenues for the second quarter amounted to $732 million, a 13% increase compared to 2022. For the full year, we maintained our top line guidance of $3.2 to $3.4 billion, with implied revenue growth of 12% to 19% versus 2022. And as Enrique explained, we now expect full-year capacity to increase by around 13%, up from 10% in our original outlook. While the appreciation of the Mexican peso positively impacted our TRASM by $0.78, our CASM was negatively impacted by $0.19 against the second quarter of 2022. Ex-fuel unit costs increased as budgeted. driven by the Mexican PESO appreciation and delivery cost, which will peak in 2023 and 2024 and gradually return to 2019 levels by 2027. We maintain our 2023 CASU Mexico guidance to be in the range of $4.7 to $4.00. Contrary to what has happened in other jurisdictions, Polaris has controlled labor costs without any significant bump and has kept its local currency increase in line with the Mexican inflation rate. In addition, we are budgeting to improve our full-time equivalent employees per aircraft at the end of the year to 58 FTEs, the same level we had in 2019, before starting to fill the void created by airlines abandoning the market. We are committed to leveraging our cost efficiency strengths and cost efficiency as a primarily competitive advantage. Our cost performance gives us confidence that during the year's second half, we can compensate for the temporary unit revenue headwinds and OEM-related fleet costs while generating profitability aligned with our full year goals. Total custom came to $740 cents for the second quarter, falling 12.9% compared to the second quarter of 2022. Our custom exude for the quarter was $4.82, a 14.8-year increase. Our adjusted cost, including fuel expenses and aircraft engine viable leases expenses or delivery costs and sale and leaseback gains, total $4.43 compared to $4.03 in the second quarter of 2022, an increase of 10.1%. Moving to fleet, during the quarter, Polaris added the three aircraft, bringing our total number of aircraft to 123. We have 70 Airbus NEOs, comprising 57% of all aircraft, and are projecting to close the year at 127 aircraft, considering an Airbus potential delay of at least two aircraft until 2024. Seats per department rose to 194 in the second quarter, a 3% increase year over year, and our fleet had an average age of 5.5 years. In the quarter, we booked viable lease expenses of $40 million, netted by sell and lease back gains of $6 million. Volaris finished the quarter with a total cash level of $655 million, representing 21% of the last two months operating revenue. The cash flow provided by operating activities in the second quarter was $159 million. Cash flow used in investing activities was $102 million, and cash flow used in financing activities was $109 million. CAPEX net of pre-delivery payments total $54 million, in line with our full-year guidance of $300 million. Our strategy to maintain operational reliability drove investments of $35 million in acquiring spare engines. The capitalized major maintenance events expenses were $22 million for the quarter. At the end of the second quarter, our net debt reiteration was 3.5 times down from 3.8 times at the end of the first quarter. Although our focus remains on the leveraging in the mid-term, we expect our net debt to EBITDA ratio to slightly surpass the initial projections for the entire year, likely reaching approximately 2.8 times. This outcome is primarily influenced by the fleet-related difficulties we previously addressed. Now I will turn the call over to Enrique for closing remarks.
spk14: Thank you, Jaime. In summary, in the second quarter of 2023, we marked significant achievements for Volaris, showcasing the advancement of our diversified growth strategy and reinforcing our position as a leading Mexican airline. Our world-class cause has been instrumental in creating opportunities for sustained growth. As a result, we are on track to achieve our annual targets. Besides the above, we will continue exercising prudence in our capacity and being conservative with our balance sheet, which will allow us to anticipate challenges and capitalize on opportunities in our markets in ways few global operators can. We have been and continue to position Volaris for the long term. As this translates into future growth, we will drive returns for our shareholders and provide a solid long-term investment opportunity. I want to close these remarks by reinforcing our commitment to double revenue EBITDA and free cash flow from 2019 levels by 2025. Thank you very much for listening. Operator, please open the line for questions.
spk00: Thank you. The floor is now open for questions. If you have a question, please press star one one on your touch tone telephone at this or any time. Then wait to hear your name announced. If at any point your question is answered and you would like to remove yourself from the queue, please press star one one again. Questions will be taken in the order they are received. We ask that when you post your question that you pick up your headset to provide optimum sound quality. Participants can also send questions via the webcast platform. You need to click on the Ask a Question button just above the video area in the upper right-hand corner and type in your question. Please hold while we poll for questions. Our first question comes from the line of Stephen Trent with Citi. Your line is open.
spk08: Good morning, gentlemen, and thanks very much for taking my question. I had two for you. The first, if I may, when you think about the new airport in Tulum, what are your high-level thoughts about servicing that airport versus also maintaining the operations that you already have in Cancun? Thank you.
spk01: So, Steve, good morning. Thanks for your question. I personally met the people from Tulum last week. I think it's too early in the equation to say what we will end up doing there. From the market perspective, it seems to be a good alternative, but we haven't made any decisions to move further on Tulum.
spk08: Okay, I appreciate that, Enrique. I appreciate that, Enrique. And just one other quick one. Any kind of high-level view, whether it's become easier or more difficult to add domestic routes since the government opened Felipe Angeles Airport? I know for you guys, you added a bunch of routes, and I was wondering if anything's changed in the process or, you know, as it was before.
spk04: Thank you.
spk02: Stephen, so we've been adding routes to our domestic network. We've been diversifying our presence in some of the smaller and secondary cities. We announced the opening of 40 new domestic routes in the quarter, and that is the highest number of routes we've opened in one quarter in the history of the company. So we continue in the same path as we've said. focusing very much on our core market and identifying opportunities for bus switching.
spk01: I would only add, Steve, that there's no change in terms of how you approve routes to be flown in the future.
spk08: Okay, that's perfect. Very helpful. Thanks, Jens.
spk00: Thank you. Please stand by for our next question. Our next question comes from the line of Dwayne Finnickworth with Evercore. Your line is open.
spk10: Hey, guys. Good morning. Just on Cat 1, specifically, what should investors be watching to gain comfort that it's going to happen and the timing on when it will happen?
spk01: Thank you very much, Duane. I appreciate your question. Let me tell you, I mean, Volaris is ready and prepared and will move forward in accordance with the Mexican U.S. authorities' time. We'll focus on our core markets and our core BFR customers, and we are still sticking to the possible date, which is sometime during the fourth quarter.
spk10: I guess just to follow up there, Enrique, from a U.S. investor's perspective, what should they be watching vis-à-vis the process to gain comfort that that timing is on track?
spk01: I think the first thing they need to see is that the U.S. recognizes that there's been a big progress at the FAQ, the authority in Mexico, and that things have progressed tremendously. The second thing, which is really important, is approval of the laws, which were already approved and are well in process. The third topic is they need to pay attention to the U.S. bureaucracy process. which has its times and its process. And I think you guys will be gaining confidence once they come out and they finish that process at the FAA and start requesting the OT to raise the category.
spk10: Appreciate that thoughtful response and understand it's not an easy question. Secondly, just with respect to the comment about positive T-RASM in the second half, could you put a finer point on that? Do you expect it to be both in the third quarter and in the fourth quarter, or is it more fourth quarter weighted? Related to my first question, is there a dependency on getting Cat 1 to bring that to fruition?
spk02: Dwayne, certainly we see a seasonally better second half of the year traditionally at Volare. So certainly we will see some uplift in TRASM versus the first half of the year. In addition to that, we do see a return of Cat 1 towards the end of the third, beginning of the fourth quarter, as Enrique just mentioned. And we have a plan in place to reshuffle capacity, take some pressure off, off the domestic market and reallocate that to the international markets. That includes free aircraft to Central America, which should also help lift travel. So we have certain actions in place and plans in place to improve travel for the second half of the year.
spk10: Okay, maybe I misunderstood. Did you say you expect year-over-year improvement in T-RASM in the second half, or just that you expect a better second half versus the first half?
spk02: Both statements are true.
spk10: Thank you very much. Thank you, guys.
spk00: Thank you. Please stand by for our next question. Our next question comes from the line of Helaine Becker with TD Cohen. Your line is open.
spk07: Thanks very much, operator. Hi, team. Just a couple of questions on the new routes. I think you said a couple of times that there were 40 or something new domestic routes and about 33 of those have no competition. Just kind of curious about the size of the market on a daily basis and what the load factors on those new routes look like and is there opportunity to improve the load factor?
spk02: Yes, these 40 new domestic routes are in mostly secondary cities in the domestic market. We have a combination of target markets there. They are all focused on generating and stimulating demand. We have some leisure routes in there from secondary cities, but we also have a lot of VFR markets in there. A big focus city is Bajio, Guanajuato, Mexicali, Culiacan. So these are secondary cities that previously didn't have direct service to other cities in Mexico. As traditionally is the case, new routes have ramp-up periods in the domestic market, typically somewhere between six and nine months. Early indications are that the routes are performing as expected. And we are stimulating the demand in these new routes with very attractive pricing and are building load factors as expected.
spk07: OK. I think that's helpful. And then shifting gears a little bit on, the capacity plans. So I think there was a plan to return the A319s, right? And so you have, are there still A319s or are they gone? And then on these routes, as you think about the right aircraft in the market, I mean, I would think as secondary cities, they would lend themselves to a smaller aircraft rather than a larger aircraft. But I don't know, what's the size of your smallest aircraft now, and will it be a drag on load factors?
spk04: In terms of fleet and lane, we already returned to A390 this year, and we have still the fleet three airplanes, which are going to leave next year. Having said that, I will pass it over to Holger for the use of the planes.
spk02: So in the domestic market, we have a mix of A321s and A320s and we have shifted capacity of the A320s to longer stage length routes and that has helped lift our productivity in the fleet and has contributed to our ASM capacity growth in the first quarter, the first half of the year. For new routes, what we typically do is we start with very few frequencies per week These new routes have about two to three weekly frequencies, and we employ the AC20 or AC21. And as we stimulate demand in these new markets, we add weekly frequencies instead of up-gaging the aircraft.
spk06: Okay.
spk01: So I have the feeling that you have a problem with our low factors, and I want to make that really clear, okay? Okay. I think we did have a little bit of our capacity during the quarter. It took us a little bit to correct that, moved some itineraries, created these new routes, moved the capacity to Central America, and we ended up basically solving the problem. So to me, what is very important to leave very clear in your mind is that there's not a demand problem. I mean, we are an ultra-low-cost carrier, so what we do is we basically reduce our pricing, we increase our ancillaries in the same proportion, and that worked perfectly. So there's not an underlying demand reduction behind what you are asking. And I want to leave it very clear, it's not a matter of sizing of aircraft. For us, the aircraft size is really important because of the cost. So let's be absolutely clear. We do have the right aircrafts, the right capacity, and the right loads going forward.
spk07: Thanks, Enrique. It's not a load factor problem I have. It's more a capacity problem I have. You know, just getting over your skis and getting – I guess the way I would say it is going into markets that are secondary or tertiary with large aircraft may not have the desired effect longer term, but that's fine. You explained it very well, and I appreciate it. Thank you very much.
spk01: Thank you, Helen.
spk00: Thank you. Please stand by for our next question. Our next question comes from the line of Michael Linenberg with Deutsche Bank. Your line is open.
spk05: Oh, yeah. Hey, good morning, everyone. I guess, Enrique, back to your point about allocating, I guess, 5% more capacity to international markets. It does look like international is doing a bit better. If we think about the first half of the year, How much more profitable were international than domestic? And presumably I think your domestic is probably just back of the envelope is losing money. And as we think going forward, is there a bit of a secular change here where maybe the international markets are going to generate better margins for you going forward? Maybe because some of these markets that you're in, you're the only carrier in the market. Maybe it's better growth potential. And maybe we're seeing a maturation of the domestic market. I know there's a lot of questions in there, but I'm trying to square why your international are doing so much better than your domestic. And will just capacity, will that solve that? Thank you.
spk02: So a couple of comments here, Michael, regarding domestic and international. Overall, currently, as Enrique mentioned, we do see a temporary increase slight excess of capacity in the domestic market, driven by the fact that our competitors have very few places other than domestic market to allocate new capacity coming into their fleet. As a reminder, we do have two Central American AOCs to be able to mitigate some of the excess capacity in the domestic market for us. Now, if we look at the split between international and domestic markets, We are allocating more capacity and we have plans to allocate more capacity once Cat 1 comes back. And if we look at our cost structure against some of our international competitors' cost structure, that cost gap has widened over the last two years. And that gives us a sustainable competitive advantage going forward, especially in the transporter market to the U.S. So, yes, we are looking at... higher international growth going forward once Category 1 comes back.
spk05: Okay. And then just one quick follow-up for Jaime. I was going to ask the question about, you know, big picture is a stronger peso better for you, but you actually broke out the differences, the impact that it had on Chasm and the impact that it had on RASM. I missed it, but it looked like The way the math was, it is a stronger peso. It's much better for you. But can you give us the impact on the two components? Thank you.
spk04: Sure, Michael. Starting with Castle, total Castle, the impact of the better effects for the quarter was $0.19 US dollars. And for the Castle, the fuel, it was $0.16 US dollars. In the TRASOM, the effect is twice, the benefit, the impact, the cost. The number on the TRASOM was $0.78 cents, the benefit during the quarter due to the strong pest.
spk05: Okay. So then when I think about... Oh, go ahead.
spk04: Sorry. Okay. I was going to say that for every 5% appreciation of the Mexican currency, EBITDA margin improves approximately in 0.9 percentage points and EBITDA margin in 1.4 percentage points improvement. Sorry, I have a flu and I throw it short.
spk05: And that's every 5% movement in the currency, I guess, appreciation?
spk04: That's correct.
spk05: So then just to go back on the CASM-X, why did that move up a bit more than it would seem like the strong peso had some effect, but it seemed like there was a bigger impact there? Is that maybe because of some of the grounded eight airbuses because of the GTF? Is there an issue there?
spk04: Partially, yes. As you should remember, since investors, we mentioned earlier, because you are comparing versus 2022 the additional cost based on the re-deliveries and fleet substitution, which that accounted together with the fleet-related cost of $0.41 U.S. dollars.
spk05: Okay.
spk04: But this is still aligned with the expectations that we have, nothing to worry about.
spk05: Okay, very good. You answered all my questions. Thanks, everybody. Appreciate it.
spk00: Thank you. Please stand by for our next question. Our next question comes from the line of Rogerio Arrujo with Bank of America. Your line is open.
spk13: Hi, guys. Thanks for the opportunity. I have a couple here. First one on redelivery costs. It seems there was a $40 million expenses quarter. How can we reduce in relation to expectations for upcoming quarters. And I understand there that Volaris is currently having higher delivery costs than what we would call a normalized scenario. Until when should it go? And what can we think about a normalization scenario in terms of delivery costs once it normalizes? That's the first one. And the second, if I may, is ancillary revenue. You mentioned there is some projects that we are excited about for the second half of the year. Can you please give us a little bit more detail on them? I know you have touched some, but what are you most excited about? Thank you.
spk04: Hi, Rodrigo. Basically, the rail deliveries, it's an impact that we are going to be seeing in 23, 24, start going down in 25, and coming back to 2019 levels in 2020, by the end of 2026, beginning of 2027. So it's a temporary bump based on the fleet substitution. We explained a lot during the investor day in December. That's basically the main reasons why the jump in those two lines noticed in this quarter, which should continue the rest of the year.
spk02: And regarding ancillary revenues, we have a couple of things that we're working on and we're maturing. Number one, clearly, the uptake in our V-Club membership program has been enormous. exceeding our expectations and now contributes a significant amount of our sales. And as we build that out, we're going to see improvements. Number two, products around insurance and helping the customer insure for their entire trip. We're working on that. And then, as we already mentioned, we just launched our Infinity program recently. with the retail partner OXO that's in early stages of development. And we should see more material contribution to ancillary revenues towards the end of the year and in 2024. Overall, we have mentioned in the past that our vision is to achieve 50% of total operating revenues through ancillary revenues. We are probably going to achieve that early than anticipated. This is just a milestone, one milestone in our journey to offer more competitive base fares with optional value-added offerings on top. So certainly the 50% mark is not the end of the line.
spk13: Okay, very clear. If I may, one follow-up from the first question. What was the 2019 levels for redeliveries?
spk04: Point 20 cents, US dollar cents.
spk13: Okay, 20, 20, 20.
spk04: Point 20 US cents.
spk13: Okay, perfect. Thank you very much. Have a great one.
spk00: Thank you. Please stand by for our next question. Our next question comes from the line of Bruno or Maureen with Goldman Sachs. Your line is open.
spk12: Yes. Good morning, everybody. Thank you for the opportunity to ask a question. I just wanted to have your help to better understand the changes to the guidance. The fuel costs or the fuel prices have fallen significantly year to date. you know the environment now from a cost perspective is much better than before and even so you are not increasing your margin guidance for the year which might suggest some weakness on the pricing side vis-a-vis what you were expecting Earlier in the year, of course, Category 1 might play a part here, but correct me if I'm wrong, but you were not expecting a major contribution from Category 1 this year, right? Maybe you are now counting on the initial plan. So what's happening there? Is demand weaker? Is competition fiercer? Any call there would be helpful. Thank you so much.
spk01: So in general, there's a lot of things happening in the revenue equation, which I think are important. The first one is we do have to balance capacity for the third quarter, end of third quarter and fourth quarter based on what is going to happen both with engines and B, there's two aircraft that are being delayed by Airbus that will not be arriving towards the end of the year. C, there's obviously, because of the economies in the U.S. and Mexico, some reduction of pricing. And in general... we're trying to balance the new capacity versus the old capacity. The introduction of new routes in the U.S. because of Category 1 has also a ramp-up. So in general, those are the most important factors, but too many things happening in the equation. Having said that, I think... sticking to our EBITDA margin guidance is something really good. And it takes us back to a level from 29 to 32%, which is really good. Thank you.
spk00: Thank you. Please stand by for our next question. Our next question comes from the line of Alberto Valerio with UBS. Your line is open.
spk11: Hi. Good morning. Thanks for taking my question. One quick one from my side. We heard today in the morning that Platinum will be recalling 200 engines for extra maintenance. I would like to know if Volaris has one of these aircraft with those engines or any of Volaris competitors in Mexico. Thank you.
spk01: That's correct. We heard Rikon in their conference this morning that they have determined the rare condition in power metal used to manufacture certain engine parts. which will require accelerated fleet inspection. They are calculating about 200 engines that need to be inspected by mid-September of this year, and it's going to be a program, a progressive program, which is calculated to be in the following six months. Thanks, Scott. The company planned to... to retain six of the aircrafts that were supposed to leave this year, and we extended those six aircraft, and that decision will allow us to better handle better any operational challenges related to engine availability and aircraft delivery delays during the last two quarters. Too early to calculate what's the real impact and where it's going to be the impact, But I think the company has the provisions and has been working on an accelerated way to try to control the impact.
spk11: Okay. Thank you.
spk00: Thank you. I'm sure no further questions in the queue. This concludes today's question and answer session. I would now like to invite Mr. Beltranina to proceed with his closing remarks. Please go ahead, sir.
spk01: Thank you very much, operators. As always, I want to thank our family of ambassadors, the board of directors, the investors, the bankers, the source suppliers for their commitment and support during another quarter. I look forward to addressing you all again in October, and hopefully I can see some of you in September when we celebrate 10 years of being public. Thank you very much to everybody. It was a great pleasure to be with you this morning.
spk00: Ladies and gentlemen, this concludes the Belarus Conference call for today. Thank you very much for your participation and have a nice day.
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