Is Volaris Aviation the Best Way to Invest in Mexico?

A recent IPO might provide the a great opportunity to invest in Mexico's air travel boom. Volaris Aviation (NYSE: VLRS  ) , a leading ultra-low-cost-carrier (ULCC) in Mexico, provides access to leading manufacturing hubs, and it could make a great play on the general overall growth in Mexico's economy and air travel.

Like most of Latin America, the majority of Mexicans travel around the country on buses. While the country's highly inefficient highway network makes bus travel time-consuming, the nation's many lower-income travelers prefer buses' cheaper fares, helping the system stay in business. But now, Volaris Aviation promises the ability to match bus fares in some areas, providing consumers with a much better travel alternative.

While the likes of Spirit Airlines (NASDAQ: SAVE  ) have grown dramatically in the U.S. on the ULCC concept, Volaris might offer an even greater opportunity. The prospects of matching the gains of Copa Holdings (NYSE: CPA  ) , which has soared 200% in the last year thanks to strong growth from its base in Panama City throughout all of Latin America, is starting to attract investor attention.

Growing demand

Though the Mexican economy has only grown roughly 1.1% during the first eight months of 2013, the Mexican DGAC (Direccion General de Aeronautica Civil) reported that Mexican airlines' passenger volume increased 9.5%. In total, Volaris accounted for 48% of that growth.

Volaris continues to take market share by growing its operations. It launched six new domestic routes during the third quarter of 2013, leading to total departure gains of 15.6% year over year.

Strong margins despite low fares
Volaris Aviation lowered its average fare in the third quarter by 12.8% year over year, so its average revenue per available seat mile (RASM) dropped by 6.2%. The company targeted passengers who travel by bus with lower base fares, and partially offset those cheaper tickets with a 4.7% decrease in costs per available seat mile (CASM) to $0.088.

These costs compare very favorably to Copa Holdings, which has CASM costs of $0.109. Naturally, Copa has higher RASM averages, and even forecasts a load factor breakeven level of 60%, it does showcase how low the costs are for Volaris. Copa has been the leading in Latin America and Volaris can justify the ULCC claim with the lower costs.

Will Volaris match the success of Spirit Airlines?
Spirit Airlines has been a huge success in the U.S. The domestic ultra-low-cost carrier continues to grow, with third-quarter revenue surging 33%. While Volaris has been aggressive by pricing fares against bus tickets, Spirit Airlines has the advantage of undercutting the legacy carriers' pricing in the U.S. 

Spirit Airlines has some interesting cost comparisons to Volaris. One might expect a low-cost provider in Mexico to produce cheaper costs, but Spirit actually gets close to the CASM cost at only $0.10. Looking at the CASM ex-fuel, Spirit sits at $0.0586, which compares closely to the $0.051 costs at Volaris. Apparently, a large portion of the cost differential relates to Spirit paying higher prices for fuel.

Bottom line
Volaris Aviation provides an interesting play on not only the growth in the Mexican economy; but also the shift from using buses as the primary transportation vehicle for long distance travel. The high growth of Spirit Airlines and Copa Holdings highlight the potential for a stock such as Volaris if it continues to execute on taking market share in the promising Latin America markets -- and Mexico in particular.


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