Controladora Vuela Compania de Aviacion, S.A.B. de C.V.

Good morning, everyone. Thank you for standing by. Welcome to Valeris' third 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. Please note that we are recording this event. This event is also being broadcast live via webcast and can be accessed through the Valeris website. At this point, I would like to turn the call over to Ricardo Martinez, Investor Relations Director, Please go ahead, Ricardo.

Good morning, and thank you for joining the call. With me today is our President and CEO, Enrique Beltranena, our Airline Executive Vice President, Holger Blankestein, and our Chief Financial Officer, Jaime Poz. They will be discussing the company's quarterly results. Afterward, we will move on to your question. 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 CMDB, these statements speak only as of the day they are made, and Volaris undertakes no obligation to update or modify any forward-looking statement. As in our earnings pre-release, our numbers are in US dollars compared to last year's quarter, unless otherwise noted. And with that, I will turn the call over to Enrique.

Thank you, Ricardo, and everyone for joining us today. I want to begin by highlighting the quarter results compared to last year's figures. In the third quarter, ESMs increased by 10%, total operating revenue by 8%, EBIT by 11%, and EBITDA by 18%. Before we explain in detail the third quarter results, which Holger and Jaime will present, I'll address two key topics. The first one, Pratt & Whitney GTF engines preventive accelerated inspections, and the second one is Mexico City International Airport's lot restructuring and FAA's Category 1 capacity ramp-up plan. Regarding the first topic, the Pratt & Whitney Preventive Accelerated Inspections, I want to provide a clear and comprehensive overview of our current knowledge of the situation. This issue affects not only Volaris, but 42 airlines globally, including two in Mexico. Pratt & Whitney's parent company, RTX Corporation, revealed in July and September that the problem with the powder metal in a high-pressure turbine disk will necessitate accelerated inspections of GTF engines on Airbus A320neo families. Approximately 3,000 engines worldwide will undergo inspections from 2023 to 2026. These inspections are mandated by the FAA after a specific number of cycles, depending on the engine type. Currently, the FAA has only issued the first service instruction for the initial batch of engines. Volare's top priority has always been and will continue to be the safety of our ambassadors and customers. Thus, we are diligently following all preventive airworthiness directives. Our current visibility of the situation is limited to the initial batch as informed by RTX to the operators. The current estimate is that, depending on the work scope, it will take roughly 250 to 300 days on average for these engines to be removed and inspected and then returned to the operator to go back into service. RTXR estimates that Pratt & Whitney will take a financial hit of about $6 to $7 billion, of which 80% is customer support, namely financial compensation to carriers, and the remaining 20% is labor and material costs for the work. We are currently negotiating with Pratt & Whitney regarding their initial financial support for Volaris issues corresponding to this first batch of engines. We expect to reach an agreement with Pratt & Whitney in the next month and will reflect the negotiated compensation and support package on our financial statements once that agreement is in place. While there is still work to be done to finalize this initial agreement, I must commend Pratt & Whitney for their responsiveness and their acknowledgment for the financial strain on Volaris due to the current engine issues. They have actively collaborated with us to mitigate any significant impact on our financials. Based on guidance from Pat and Whitney, we expect there will be additional work required on the new engine lasting into 2024 and 2025 beyond the initial preventive inspections. While we are in discussions with Pratt & Whitney on how best to mitigate these ongoing issues and to ensure appropriate compensation and support to Volaris, we don't expect to have any clarity on the longer-term impact until first quarter of 2024. We will provide subsequent updates as appropriate. Today, Volaris fleet comprises 126 aircraft, of which 22A321 NEOs and 51A320 NEOs may be temporarily affected. Once the initial directive was published, Volaris and Pratt immediately identified the engines requiring preventive accelerating inspections. In September, there was an 8% reduction in ASMs and an estimated revenue impact of $18 million versus the forecast associated with our original published capacity. Thus, on October 10th, we revised our ASM growth for the full year 2023 to be 10% versus our previous guidance of approximately 13%. This translates to a fourth quarter 2023 total capacity remaining virtually flat compared to the fourth quarter of 22. Despite this capacity reduction in our forecast, we anticipate that our total operating revenue for the year will remain at the low end of this year's annual guidance provided in February, reaching approximately $3.2 billion. The situation is still evolving, but we anticipate engine inspections will limit capacity deployment from the engines to be inspected until they are completed by 2026. Management is looking for alternative solutions to mitigate the impact and will consider, for example, extending leases and identifying available CEO aircraft. It is premature to forecast a potential impact on our 2024 growth plan, but notwithstanding our mitigation initiatives, it is fair to assume that we will be forced to shrink our capacity in 2024 as a result of this engine issue. As we've done in the past, the Volaris management team will again do our best to respond to the challenge. We have designed the mitigation plan to manage changing variables and generate shareholder value. As an ultra-low-cost carrier, we're always focused on managing costs. We control and implementing strategic initiatives to offset the impact of those we do not control. In this case, these initiatives include, first, we're optimizing our network, by taking advantage of the recovery of Mexico's Cat 1 status, reducing growth to new markets and cutting capacity on underperforming routes. Second, we are maintaining strategies to stimulate demand and enhance ancillary penetration to drive unit revenues. Third, as noted above, we are currently negotiating lease extensions for several CO aircraft initially scheduled for delivery in 2024 and 2025. Fourth, We are implementing additional cost efficiency initiatives, which include reducing red delivery expenses in the short term. Fifth, on the OEM side, we are maintaining our new Airbus aircraft deliveries for 24 and 25, which currently includes 24 already financed aircraft. Additionally, we are actively pursuing further tactical additions in both aircraft and engines. RTX has stated, I quote, we're still able to deliver new engines and spare parts due to the deployment of the angle scan inspection. Moving on to the second key point on Mexico City International Airport and Cat 1, the Mexican Aviation Authority has announced a reduction at the Mexico City Airport from 52 to 43 aircraft slots per hour, effective January 8, 2024, after the holiday season ends. As a result of this adjustment, Olaris will have four aircraft lines available for redeployment to other domestic stations, primarily serving routes to the U.S. following the Cat 1 up. For 2023, our estimated EBITDA margin is anticipated to achieve approximately 26%. We will continue to execute diligently our mitigation plan in the short term to manage our costs around the reduced operating fleet size. while thoughtfully retaining key personnel so that we may resume our long run growth trajectory and superior cost profile when the engine inspection situation has passed. I will turn the call over to Holger to discuss our quarterly operating results and go forward network strategy.