High Fuel Prices Cause Headwinds for Mexican Low-Cost Carrier Volaris

The low-cost airline’s passenger numbers dropped in June, and which some analysts see as a sign of increased fares due to higher fuel costs

A ground crew member connects a fuel hose to an Airbus A321 aircraft at Tegel airport in Berlin, Germany, on March 13, 2019.
July 14, 2022 | 12:40 PM
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Mexico City — The pressures generated by higher fuel prices are likely to already be reflected in the operating results of Mexican low-cost airline Volaris, the carrier with the country’s largest passenger numbers, according to analysts.

Volaris recorded in June a reduction in its seat occupancy, an indicator that measures the efficient use of airline capacity, which was down by 4.7% compared with June 2021. The reduction was 3.7 percentage points lower in domestic operations, and 6.6 percentage points in international.

The reduction could be an indication of the effect on demand from the increase in fuel prices and its subsequent effect on fares, according to Marco Antonio Montañez, an analyst at Vector, in a note on Volaris’ June traffic results.

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“The company has been able to pass on this fuel increase in ticket prices, but we do not see that it can be sustainable, as Volaris’ business model is based on stimulating demand with low fares,” Montañez wrote.

Volaris, which does not hedge fuel, reported a 107% increase in the price of kerosene, paying $4.60 per gallon in June, up from $2.20 in June 2021.

“It is an important impact on the cost structure, and we are trying to cushion that cost with the new fleet and new engines,” Enrique Beltranena, CEO of Volaris, said in a July 1 media briefing.

In his response to the media, Beltranena made no reference to the selective fare adjustment he had indicated in previous months.

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Inflation in air transport in Mexico was evident at the beginning of June. In the first fortnight of the month, the air transport price index increased 6.62% with respect to the same month of 2021, having an impact of 0.015 percentage points on general inflation.

Despite this, air transport in Mexico closed June with growth of 2.51%., but which was below the 7.99% increase in general inflation, the first time this has happened since February 2021.

Volaris maintained its position as the leading airline by number of passengers carried during the month, transporting 2.4 million passengers, 10% more than in the same month of the previous year.

“It maintains its leadership in terms of traffic recovery in Mexico, a result of the measures implemented by the carrier to increase its operating capacity, with an increase at the local and international route and fleet levels,” wrote Brian Rodriguez, an analyst at Monex, in a note.

For its part, Aeroméxico, which until a few months ago was lagging behind in terms of traffic recovery compared to its low-cost competitors, recorded a 39% year-over-year growth in passenger traffic in June.

Aeromexico increased the number of international passengers transported by 66%, which was considered by Rodriguez of Monex as aligned with the company’s strategy of recovering ground in the international segment.

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Other analysts expect the results of Aeroméxico’s strategy to become even more visible in the remainder of 2022 and 2023.

“We expect Aeromexico to have a more accelerated recovery in relative terms, benefiting from a recovery in the international market and business travelers,” wrote Luis Miranda, Heinz Cedeborg, Guillermo Oreamuno and Ricardo Espinosa, analysts at HR Ratings, in a note on the sector published at the end of June.

Aeroméxico is currently preparing to delist from the Mexican Stock Exchange.

Viva Aerobus, the country’s third-largest airline by passenger numbers, increased traffic by 28.5% in June, driven by the growth of domestic passengers (34%), which more than offset the 4% drop in international traffic.

The low-cost airline “maintains a strategy based on low-cost fares, and serves mainly the domestic leisure market,” wrote PC Verum analysts in a note on the company.