Controladora Vuela Compania de Aviacion (VLRS) Q2 2019 Earnings Call Transcript

Controladora Vuela Compania de Aviacion (VLRS 4.36%)
Q2 2019 Earnings Call
July 26, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, everyone. Thank you for standing by and welcome to Volaris' second quarter 2019 financial results conference call. All lines are in a listen-only mode. Following the company's prepared remarks, we will open the call for question and answer. Instructions on how to ask a question will be provided at that time. Please note that this event is being recorded. At this point, I would now like to turn the call over to Miss Maria Elena Rodriguez, Volaris' Corporate Finance and Investor Relations Director. Please go ahead.

Maria Elena Rodriguez -- Director of Corporate Finance and Investor Relations 

Good morning, everyone and thank you for joining the call. With us today is our President and CEO Enrique Beltranena, our Airline Executive Vice President Holger Blankenstein, and our Vice President and CFO Sonia Jerez. We will be discussing the company's second quarter results announced yesterday. Afterwards, we will move on to your questions. Please note that this call is for investors and analysts only. Any questions from the media will be taken separately.

Before we begin, please let me remind everyone 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 actual results to differ materially from expectations for reasons described in the company's filings with the US Securities and Exchange Commission. Furthermore, Volaris undertakes no obligation to publicly update or revise any forward-looking statements.

It's now my pleasure to turn the call over to Volaris' President and CEO, Mr. Enrique Beltranena.

Enrique Beltranena -- President and Chief Executive Officer

Thank you, Maria Elena and good morning to everyone and thank you for joining us today. Let me begin with some key facts and data of the second quarter. Volaris is one of the three lowest-unit cost publicly traded airlines in the world, with a unit cost ex-fuel during the quarter of $3.89 US. Cash ex-fuel decreased 3.3% year over year. Total unit revenue in the quarter improved 10% year over year. I'm going to explain some of the elements.

Total ancillary revenues increased 39% year over year. Volaris ancillary revenues per passenger increased 10% and now, Volaris is among the top four airlines in the world. Second, Volaris is the largest passenger operator in the Mexican market with 40% more passengers carried than our closest competitor during the quarter.

In this market, Volaris operates with a low factor of 90%. Third, Volaris is the global carrier with the most direct routes to the US. In the last ten years, we have carried almost 20 million passengers in the transborder market. In addition to that, with the new Frontier codeshare, we now connect almost 100 US destinations with our Mexican markets.

Volaris completed important strategic financial transactions during the second quarter. The first one was that we secured the landmark sale and leaseback transaction for 22 aircraft that we will be delivered between 2020 and 2022. The terms and lease rates are highly attractive and are historically unprecedented for the company.

The second one is that Volaris successful issued a 1.5 billion peso-denominated long-term bond in the Mexican public market at the very competitive term, notwithstanding the difficult capital market conditions during the process of placing the instrument. To facilitate development of our Central American initiatives, Volaris has established a subsidiary in El Salvador and obtained its airline operator certificate from the Civil Aviation Authority. We are targeting operations to start during August 2019.

These achievements led to the following second quarter 2019 results. Total operating revenues increased by 34% with a year over year TRASM improvement of 10%. EBITDA margin improved by 10.4% touchpoints versus last year, closing at 27.7% and operating cash flow generation of 1.5 billion pesos, a year over year improvement of 618 million pesos. On time performance is on track and schedule completion is at 99.5%, return on invested capital pre-tax of 16% at the end of the quarter. Nevertheless, I would like to additionally highlight that the earnings per ADS for the first half of the year at $33 US.

Now, I would like to turn the call over to our Airline Executive Vice President Holger Blankenstein to talk about the detail of revenues, market dynamics, and give an operational update. Please, Holger.

Holger Blankenstein -- Airline Executive Vice President

Thank you, Enrique. Total ASM growth was 22% above our previous stated guidance as a result of high utilization, new routes, and a focus on our core markets. Domestic ASM growth for the quarter was also 22%. DFR traffic and the bus market remain our most important drivers of growth.

We have been diversifying our point to point network, focusing on non-competed routes to sustain our double-digit growth. The ultra-low-cost model penetration in the Mexican market is expected to continue throughout 2019 and beyond. In the international market, our ASM capacity growth was 21%. We continue observing a more sustainable transborder market. The VFR segment shows solid demand, supported by remittances from the US.

Capacity in Central America represented only 3.4% of our total ASMs by the end of the second quarter. The region is maturing well and is contributing to our US dollar-denominated collection. While still a smaller part of our business, it is growing well and performing to our expectations. As Enrique mentioned, we obtained a foreign air carrier permit to operate direct flights from El Salvador targeting to start during August of this year. El Salvador and Guatemala are the most fertile VFR markets in Central America.

In the second quarter, we started operations in five new domestic and four new international routes from existing stations in order to continue developing our point to point services and attracting first-time fliers. We are strengthening point to point presence in cities like Queretaro with three new domestic and one new international route and from Durango, with two new domestic and one new international route.

In the second quarter, we achieved a passenger volume growth of 26% year over year. We improved our total load factor by 1.5 percentage points, which shows that our ultra-low-cost model has been well-accepted by the market.

In the domestic market, the load factor was 90%, while in the international routes, it was 82%. This represents an improvement of 1 percentage point and 2.8 percentage points, respectively, versus last year. During the second quarter of 2019, total ancillary revenues reached 2.9 billion pesos, an increase of 39% year over year and now accounts for 35% of total operating revenues.

We continued improving our v.club and v.pass memberships. By redesigning our purchasing flows and optimizing overall usability and payment processes, we can reach more customers, allowing them to become frequent fliers.

We also launched a new combo ancillary product in the first quarter, which has found good uptake from our customers in the second quarter. We are in the process of introducing a new dynamic pricing tool for ancillary revenues in order to maximize revenue in selected products. The rise of ancillary revenues allows us to keep offering the lowest base fares in order to stimulate passenger demand. Such increase in volume supports our growth in terms of TRASM.

In the third quarter of this year, we will be adding two Airbus A320neo aircraft to a young and fuel-efficient fleet. Volaris bus switching has been the cornerstone of our growth strategy. As the bus industry in Mexico and Central America accounts for almost 3 billion trips per year, Volaris marketing campaigns are tailor-made to specific media outputs across our customer journey. Since 2014, we have carried over 4 million bus switchers. 86% claimed they wouldn't travel again by bus. Over 11% of our customers check bus fares first, yet they choose to fly on Volaris.

In 2019, we are also giving special focus to operating our digital channels. As a digital airline, almost 70% of our sales are made through our own digital channels. If we include indirect digital channels like OTAs and agencies, it represents 90% of our total sales. Today, 90% of Mexican internet users have a smartphone versus 22% in 2009. The preference of our customers has clearly shifted from desktop to mobile.

Currently, traffic from mobile devices represents 64% of our visits to our digital channels. The focus on mobile phones has been a cornerstone of our digital strategy. Our mobile phone chatbot now handles over 80% of customer service interactions, which delivers significant reductions in call center costs. We will continue to invest into our digital storefronts throughout the year with improvements in the purchasing process on the desktop side and better upsell of our auxiliaries in all channels.

All of this has resulted in Volaris becoming one of the best airlines in the world in terms of low cost in sales, marketing, and distribution. At the same time, Volaris is rated one of the top brands in Mexico, measured by America 2.0 and our mobile app is the number five downloaded app in Mexico. In terms of our codeshare with Frontier, we now serve almost 100 cities in the US at minimal incremental cost for the company. During the second quarter, this represented 3.3 percentage points of load factor on US routes.

We are especially pleased with the strength of the VFR traffic. Therefore, we are now planning ASM growth for the third quarter in the high teens for the entire networks, relatively evenly split between international and domestic growth. It is important to highlight that we are planning to achieve it through healthy capacity growth, which means high utilization of existing assets.

In summary, we would like to emphasize that TRASM improvement trend over the last 12 months is going to continue, supported by strong performance in auxiliaries and an increasing traffic demand. We achieved a TRASM of 135.5 peso cents in the second quarter 2019, 10% higher than the second quarter of 2018. We are keeping up the year with a positive revenue momentum, delivering margin improvements. Higher TRASM continues to be the commercial team's number one priority.

Now, I'd like to hand it over to our Vice President and CFO Sonia Jerez to further discuss our financial performance for the quarter.

Sonia Jerez -- Vice President and Chief Financial Officer

Thank you, Holger. I will now review the five main achievements of the second quarter. First, TRASM ex-fuel closed at $3.89, which represents a 3.3% year over year reduction, where the most important drivers were one, the continuous companywide cost reduction, two, the operation of the company with the most fuel-efficient fleet in the market with an average of 186 per aircraft and with 24% of our aircraft with new technology, and three, utilization -- utilization of our fleet is at 13.1 block hours per day. Block hours per day had an increase of 13.5% year over year.

Second achievement -- total CASM was $6.50 for the second quarter, in line with last year. The cost cutting program initiatives continue setting the increase in the average economic fuel cost per gallon, which was mainly driven by the new transfer fees added by the jet fuel suppliers in the domestic market.

During the second quarter, Volaris executed a fuel tender in order to partially rectify these incremental transfer costs. The fuel cost savings achieved from these initiatives began materializing during the second half of the year. Additionally, Volaris hedged 30% of its projected debt fuel consumption for the remainder of 2019, mainly through [inaudible] at an average price of $1.91 per gallon.

Third achievement, our solid balance sheet and good liquidity -- Volaris had a net cash flow provided by operating activities for the second quarter of 1.5 billion pesos, closing the quarter with cash and cash equivalents of 1.1 billion pesos. This represents 36% of the last 12 months operating revenues. The adjusted net debt to EBTIDA ratio closed at 4.4 times.

Fourth, as Enrique mentioned earlier, during June, the company successfully completed the first challenge of a five-year, 3-billion-pesos local-born program with a first issuance of 1.5 billion Mexican pesos at the Mexican Interbank rate plus 175 basis points. The bond is rated AA+ with a stable outlook by two local rating agencies. The investor rate is well-diversified, comprising brokerage houses, private banks, and private venture funds.

It is a Mexican peso-denominated debt and it diversifies our financing portfolio. And our [inaudible] achievement, the company executed leaseback documentation of 22 Neo aircraft to be delivered from 2020 to 2022. We achieved very attractive lease rate factors with different results, mainly from Asia. All these aircraft are fully financed, including the pre-delivery payments.

In peso exchange rate status, the Mexican peso had appreciated 1.1% against the US dollar compared to the end of the previous quarter. The company's second quarter US dollar-denominated collections were 44%, partially helping us to insulate the company from exchange rate pressures and reflecting the company's effort to have a natural hedge from [inaudible]. This growing trend in our collections substantially closes the gap of the FX mismatch and brings us closer to becoming FX-neutral.

Moving on to our financial results, we exceeded our guidance for adjusted EBITDA margin in the second quarter, reaching 27.7% or 2.3 billion pesos and a 7.9% EBIT margin or 659 million pesos. Net income for the quarter was 1.5% or 119 million pesos. Our EBITDA margin guidance for the third quarter, assuming current exchange rate and fewer prices is expected to be in the low 30s. Bear in mind that our performance in the second half of 2018 was much improved versus the first half, which will make our second half 2019 year over year comparisons smaller. We expect healthy actual results.

Now, I will hand the call back to Enrique for closing remarks.

Enrique Beltranena -- President and Chief Executive Officer

Thank you, Sonia. Volaris has been proactive during the last two and a half years in counteracting the economic upward pressure on costs. From the beginning of 2017, the net jet fuel impact on total costs for the company was 1.6 billion pesos. The companywide effort to improve our financial performance also focused on the revenue side, accounting for 1.8 billion pesos in incremental revenue during the same 30-month period.

All in all, the company has had a strategy where its healthy capacity growth and deliberate management of departures, fleet utilization, passenger demand, load factor, and ancillaries offset the cost hit. Volaris [inaudible] network system to drive higher departures and healthy ASM, it is now number three in the world, measuring ASMs per aircraft per day.

This translates itself in the strong productivity of our fleet. Stronger regional market demand produced higher RPMs and load factors that reached 87% across the system. This demand supported higher yields and with Volaris' ancillaries revenue model produced stronger TRASM and increased topline revenues. We worked hard to rethink and simplify the airline to the extent that we produced 4.2 billion pesos -- let me repeat that number -- 4.2 billion pesos in non-oil cost reductions over the same period.

This amount is the equivalent to operating the airline for four months without incurring any fuel expense. We have talked about our strong passenger growth, but let me explain and unpack what we see occuring in our markets. Over the last six months, Volaris' 21% passenger growth comfortably exceeded our ASM's growth of 17%. This is not a knock or an anomaly, but it is supported by the following macroeconomic indicators. I think there are a lot of moving variables that you must analyze. Let me start with the first one.

GDP growth across Mexico is not uniform. The GDP growth with or without [inaudible] Mexican states in which we operate is higher than the national average GDP. Remittance growth shows a positive trend with record highs. The US migration limitations and the US economic performance is allowing the US Hispanic population to send more money to their relatives in Mexico, who as a result are flying more into the domestic Mexican market. This explains our stronger domestic demand and continuous tourism growth.

The third measurement is the real wages, the Mexican real wages and private consumption, which remains resilient. The fourth one is the Mexican Consumer Confidence Index, which continues to grow at a sound pace. And experts remain positive, mainly in the states where we have more presence.

The index for the Mexican air transportation industry improved versus previous. Finally, the company's growth is not only organic but also, as Holger mentioned, it is a result of a conscious strategy, which targets new passenger segments. The bus switching strategy has substantially increased our volume over the last decade.

Let me give you the numbers -- the available bus switching market in Mexico is approximately 38 million people. In 2007, air trips per capita in Mexico were 0.25 growing to 0.40 times by the end of 2014, which is still below other developing economies in the region. Mexico's air traffic grew from 55 million annual passengers in 2007 to 97 million annual passengers by the end of 2018. This is despite ups and downs in the GDP each of the years that we lived.

In conclusion, we certainly look at several competitive strengths that support our views of growth. The first -- our capacity to grow as a point to point operator in the most important airports in Mexico and our top-tier on-time performance is a clear differentiator. Together with our low-pace fairs that have allowed us to become the best travel option in those markets.

Second, our focus on cost per available [inaudible] ex-fuel positions are among the three lowest cost operators in the world. Based on public data and audited accounting practices, this cost advantage allows Volaris to expand the ultra-low-cost model in a very profitable way by benefiting the large domestic population with very affordable airfares.

Third, on the operational side, the company executes more than 400 daily takeoffs, which allows Volaris to fly a diversified system schedule that keeps us attracting new customers.

I want to finish this morning thanking all of our ambassadors who have done so much to achieve these solid second quarter results while also continuing to deliver excellent service and reliability to our customers. I need to thank you to our board of directors for supporting us to find ways to increase efficiency and drive productivity. We would like to leave a special thanks for Roberto Kriete, for Rodrigo Salcedo, and for John R. Wilson for their dedication this many years to the board.

Thank you to our investors for believing in our commitment to the continued development of a successful business. We continue our track record of no excuses and for four quarters in a row achieving our expected results.

Let me now pass it over to the operator and we are now ready to open the call for questions.

Questions and Answers:

Operator

At this time, if you would like to ask a question, press *1 on your touch tone phone. Again, that is *1 to ask a question. We'll take our first question from Duane Pfenningwerth of Evercore. Your line is open.

Duane Pfennigwerth -- Evercore ISI -- Analyst

Thank you. So, double-digit TRASM growth, very solid declines in non-fuel cost, not a lot of models around the world that offer that right now driving very strong margin expansion. Can you talk sort of high-level your view or prospects for margin expansion in the back-half of the year.

Enrique Beltranena -- President and Chief Executive Officer

Yes, Duane. Thank you very much and thanks for your comments. We think, Duane, that we can basically sustain the performance that we had during the first half of the year. Obviously, as Sonia explained, the numbers of last year in the second half improved dramatically during the first half, so, our comparison is higher in the first half. I'm expecting to continue performing the way we are performing, but probably at a smaller pace.

Duane Pfennigwerth -- Evercore ISI -- Analyst

Okay. On the A321neo delivers, are there any recent or incremental delays or supply chain issues you're seeing? I know you had to reslot some of those in the past, but let's say in the last 30-60 days, are you seeing any incremental A321neo delays?

Enrique Beltranena -- President and Chief Executive Officer

We only had one month delay this year in the two deliveries we took in the first semester. We're expecting somewhere where there could be in the second half.

Duane Pfennigwerth -- Evercore ISI -- Analyst

And then lastly, the 10% TRASM growth -- would you be willing to offer a view on how did that look in domestic versus transborder versus the Central American Operation? Thanks for taking the questions.

Enrique Beltranena -- President and Chief Executive Officer

Thank you, Duane. I will ask Holger to answer that one.

Holger Blankenstein -- Airline Executive Vice President

TRASM expansion was relatively equal between the domestic and internationals. Obviously, Central America, the ramp up was probably a little bit higher than 10%. That's the breakdown.

Duane Pfennigwerth -- Evercore ISI -- Analyst

Okay. Thank you.

Operator

We'll take our next question from Michael Linenberg of Deutsche Bank.

Michael Linenberg -- Deutsche Bank -- Analyst

Hey, good morning, everybody. I have a couple here. To start with you, Holger, you talked about the capacity growth, 22% and then high teens, routes where there is little to no competition -- I think you said non-competed routes. I know we've been seeing that in both your transborder and maybe to a lesser extent in domestic Mexico.

Do you have any breakdown where if you were to look at your domestic city pairs, what percent have head to head competition, which presumably a decent number of them probably have competition head to head, but in the transborder, if you look at the number of city pairs you're flying today and what percentage of them have head to head competition, I suspect it's quite low, but you would have any of that data just to support my premise?

Holger Blankenstein -- Airline Executive Vice President

So, Michael, what we can tell you is about 20% of our capacity in terms of ASMs is operated in non-competed routes. That's translated into about 80 routes that have no competition. If you look at the transborder market, we're also focused on the VFR niches that connect directly to Central Mexico. We do have a sizable number of routes that don't have any direct competition to the US as well.

Michael Linenberg -- Deutsche Bank -- Analyst

Could I ask a question about in Central America with the FAA moving Costa Rica to level two from a safety aspect, as you start the new operation out of El Salvador, you won't be able to add additional capacity to the Costa Rican operation until that safety level rating is moved back to what it was previously. Is that correct?

Number two, does it really matter all that much now that you have an El Salvadorian operation, any growth you can take advantage of since the US and many of the Central American countries have open skies and therefore, they allow freedoms, so it really shouldn't change your plan on that. Can you talk about that? I guess this would be to you, Enrique.

Enrique Beltranena -- President and Chief Executive Officer

Sure. Let me tell you, the US rating clearly freezes expansion to the US, not to the rest of the areas. The second point I would like to clarify is this is a qualification that is given to the Costa Rican Aviation Authority, so, I want to be very clear that we are working with them to support the efforts to run normally as soon as possible. But Volaris Costa Rica recently obtained its certificate, which makes our certificate in our operations really safe.

The third statement I would like to make is we had launched so much capacity before this happened that in reality, what we're doing is maturing that capacity, to, it is not having an impact on the numbers. Rather than that, it's making the numbers better. Fourth, I would like to say the Salvador operation is going to pick some of them.

Michael Linenberg -- Deutsche Bank -- Analyst

Okay. That's really helpful. I'm aware and I'm sure we'll make investors aware that this FAA rating is applicable to the country and not the airlines that are serving the countries. We feel pretty good about your operation. Just an add-on about the Central American operation is one of your competitors in the region has been scaling back in some of the large markets. I think they recently indicated they're going to pull out of Miami-El Salvador, Miami-Guatemala City.

When I think about Volaris, I know historically when you fly internationally from some of those markets, you may move into some of the smaller markets as you target VFR markets, but is it possible that we can see you move into some of what I would call the trunk routes that are being abandoned by one of your largest competitors. Is there an opportunity for you to fly from Miami into some of the key Central American cities?

Enrique Beltranena -- President and Chief Executive Officer

I cannot speak about the upcoming capacity yet until we have authorizations. But we are certainly focused on the region.

Michael Linenberg -- Deutsche Bank -- Analyst

Nice job this quarter, Enrique. It looks like a good forecast. Well done.

Enrique Beltranena -- President and Chief Executive Officer

Thank you very much, Michael. I appreciate your comment about making investors know the qualification of Costa Rica is not about the safety of Volaris. Rather than that, Volaris has just received the certification which guarantees safety operation.

Operator

We'll take our next question from Josh Milberg of Morgan Stanley.

Josh Milberg -- Morgan Stanley -- Analyst

Hi, guys. Thank you for the call and congrats on the results. My question relates to the fuel transfer costs that Sonia highlighted. I was just hoping you could comment a little further on that issue and the initiatives you've taken to address it. Also, with the initiatives, how might we expect those costs to evolve in the second half and next year? That actually seems like it's something that could be a relevant driver in the coming quarters. Correct me if I'm wrong about that.

Sonia Jerez -- Vice President and Chief Financial Officer

You are completely right. So, specifically, the fuel costs, as I mentioned, we finalized a fuel tender for the domestic market. It was very successful. We were able to reduce our [inaudible] increase what we have due to the increase of transfer price. And as I also mentioned, not only is that going to help us to offset fuel cost, but also a lot of cost savings initiatives across the board.

Regarding our expectations from the same quarter, remember that we had started the cost savings plan in 2018, which means that we're going to see less improvement in the second half of 2019 compared to 2018, but we're continuing very, very focused on maintaining our costs ex-fuel.

Josh Milberg -- Morgan Stanley -- Analyst

I was referring specifically to the fuel transfer costs in the second half. But Sonia, you did get --

Enrique Beltranena -- President and Chief Executive Officer

So, most likely, it's going to be about a third of the first semester costs -- a reduction of a third to the first semester cost.

Sonia Jerez -- Vice President and Chief Financial Officer

That's it.

Josh Milberg -- Morgan Stanley -- Analyst

Got it. Thank you.

Enrique Beltranena -- President and Chief Executive Officer

In the domestic market, obviously.

Operator

We'll take our next question from Helene Becker of Cowen. Your line is open.

Conor Cunningham -- Cowen and Company -- Analyst

Hey, guys. It's actually Conor Cunningham in for Helene. I know you just raised your capacity outlook. It makes sense given the demand environment. I'm just curious what would need to happen for you guys to scale back or push growth further. Is it simply a supply and demand equation? How much does the competitive response play into that decision?

Enrique Beltranena -- President and Chief Executive Officer

First, I'd like to remind everybody that what we're doing is healthy capacity addition. So, we're increasing the utilization. We're using our existing assets more effectively by producing more ASMs per aircraft per day. That's number one. Number two, clearly, the competitive landscape plays a role also in our capacity guidance and plans going forward.

We've seen some of the high-cost carriers in Mexico scale back domestic capacity and we're taking advantage of that and backfilling capacity in our core markets. Obviously, demand environment plays a very significant role. We're seeing very significant demand in the transborder market in Central America and also in the price-sensitive domestic markets to the beach markets and to the VFR market.

Conor Cunningham -- Cowen and Company -- Analyst

That makes sense. Just on the RASM side -- it seems like you guys are guiding RASM to remain positive despite a challenging comp in the third quarter. I think the comp headwind is really more domestically focused than it is international or Central America. I'm curious your expectations around each region in the coming quarters. Is it fair to assume that domestic will lag a little bit but international and Central America should outperform?

Enrique Beltranena -- President and Chief Executive Officer

So, again, quick clarification -- we think about our business in terms of TRASM, total RASM, which includes the ancillary piece. What we've been seeing are declines in yields or in RASM and increases in our ancillary business, which leads to a higher TRASM overall. By regions, we continue to see relatively similar growth in TRASM in both geographies, US transborder and domestic market. And then as Central America is in wrap up, TRASM growth there would be a little bit higher than the average.

Conor Cunningham -- Cowen and Company -- Analyst

Great. Thank you.

Operator

We'll take our next question from Rogerio Araujo from UBS. Your line is open.

Rogerio Araujo -- UBS -- Analyst

Hi, everyone. I have a couple of questions. One is a follow-up on the very strong TRASM. Is there a possible way that you could break down which routes are explaining this very strong TRASM expansion even with the 22% as increased in the period -- what I mean is if you break down routes in which your competitors are taking off capacity from routes that your competitors' capacity is flat, is there a huge difference between them? In other words, is most of this very TRASM explained by those routes in which your competitors are taking capacity from or not?

Holger Blankenstein -- Airline Executive Vice President

We don't break down TRASM by geographies specifically, but what we can tell you is we're seeing TRASM lift across the network. Here, it is important to mention that Volaris healthy capacity growth is focused on the northwest of the country and less of the southeast of the country.

If you look at regional GDP growth in Mexico, the country's GDP growth has been stronger in the northwest of the country. For example, we see new routes in Queretaro, Aguas Claientes, Bajio, Guadalajara. Those are secondary cities in Mexico which are located in the center and in the west of the country. That has contributed definitely positively to our TRASM expansion.

Rogerio Araujo -- UBS -- Analyst

Okay. What about routes in which your competitors are taking capacity from? Is it also boosting the TRASM?

Holger Blankenstein -- Airline Executive Vice President

We are very clear about our core business in the center and west of the country and we are closely observing capacity movements from the competitors in those markets.

Rogerio Araujo -- UBS -- Analyst

Thank you. My second question is on the operating income. There was a significant gain of about 120 million Mexican pesos. My question is is this related to sales and leaseback gains? Also, a follow-up, is there any non-recurring item in these results in the revenue or in the cost besides this sale leaseback? Thank you.

Sonia Jerez -- Vice President and Chief Financial Officer

Yes. So, the company in the second quarter has two aircraft arriving. Based on IFRS adoption that we did in general this year, we have to amortize the leaseback gains over the lease term. That compares differently to 2018, where those gains were accounted as a one-off.

Rogerio Araujo -- UBS -- Analyst

Sorry, can you explain this better?

Sonia Jerez -- Vice President and Chief Financial Officer

Sure. So, IFRS accounting rules -- it's an obligation the sales of leaseback gains must be deferred over the lease period. But before IFRS, all those gains were accounted as a one-off. Is it clear?

Rogerio Araujo -- UBS -- Analyst

Yes, it is clear. So, the other operating income line, this is not a one-off gain from sale leaseback, right?

Enrique Beltranena -- President and Chief Executive Officer

In reality, what's going on is you are comparing versus a year, we used to put the one-time shot when the aircrafts arrived and now, that's amortized through, let's say, a 12-year period. That's the new rule. That explains the reduction of 46.7% versus previous year. It's basically because of the new IFRS adoption.

Rogerio Araujo -- UBS -- Analyst

It's clear. Thank you. There is a sure gain. What is this related to?

Enrique Beltranena -- President and Chief Executive Officer

I'm not sure I'm understanding your question, Rogerio.

Rogerio Araujo -- UBS -- Analyst

So, I want to know what is included in this other operating income line.

Enrique Beltranena -- President and Chief Executive Officer

The sale leaseback gain? We also have administrative expenses, travel expenses, technology and communications, marketing, but that's more in the other operating expenses.

Rogerio Araujo -- UBS -- Analyst

Was there any relevant one-off impact this quarter?

Enrique Beltranena -- President and Chief Executive Officer

No.

Sonia Jerez -- Vice President and Chief Financial Officer

No.

Enrique Beltranena -- President and Chief Executive Officer

It's just the sale leaseback.

Sonia Jerez -- Vice President and Chief Financial Officer

Exactly.

Rogerio Araujo -- UBS -- Analyst

Thank you very much.

Operator

And we'll take our next question from Stephen Trent of Citi. Your line is open.

Stephen Trent -- Citigroup -- Analyst

Thanks very much, everybody and good morning. Some of my questions have already been answered, but I wanted to dig in a little bit on some of your digital initiatives. I know you guys recently launched Yavas. Any color as to what sort of program growth we can think about over the next six months or so and how this might contribute to your RASM/CASM spread? Thank you.

Holger Blankenstein -- Airline Executive Vice President

Thanks, Stephen. We launched Yavas publicly in mid-April 2019. We're talking about a three-month period that it's been running. Currently, the project is maturing and has a positive trend, but I would say it's currently not material for the ancillary revenues yet. We see sales of that new business unit growing week over week.

We are seeing quite healthy margins, but clearly, we have a roadmap to make this business more meaningful in the future. We're focusing on strengthening the content in the offering, elevating our online brand awareness, which will obviously boost sales while maintaining the quite health margins of the business. Eventually, it will contribute in a more meaningful way to the auxiliary revenues per passenger.

Stephen Trent -- Citigroup -- Analyst

Very helpful, Holger. Appreciate that. Just one other thing -- you've already kind of answered it -- you guys mentioned sometime back that there were a couple of dozen routes where nowhere align was only interstate bus and I know you've certainly launched service in some of those routes. When you think about these new opportunities from some of your competitors pulling back, etc., any sort of broad sense how much is left of that first category that's only current served by interstate bus or cross-border bus service, etc.

Holger Blankenstein -- Airline Executive Vice President

So, Stephen, there are several midsize cities in Mexico that we don't operate yet, that we don't have service to. That's about ten airports. We're looking at that. Then we're adding point to point service between cities that we already operate. We do believe that looking at the bus traffic and the bus runs between those cities, there continues to be a sizable opportunity for adding service in those secondary markets, between cities that we already operate -- so, connecting the dots, so to say.

Stephen Trent -- Citigroup -- Analyst

Crystal clear. Thank you very much, Holger. Thanks, guys.

Operator

There are no further questions at this time. I would be happy to turn the call to management.

Enrique Beltranena -- President and Chief Executive Officer

I would like to close with a topic which grows in importance daily at Volaris and it's the corporate sustainability. Each year, we work hard to increase our efforts in this area. The IR team will share our annual sustainability report together with a project which is very near and dear to Volaris. It's a movie, which is called [inaudible] that we supported. This documentary follows the [inaudible] and the environmental impacts on its Mesoamerican habitat. It is our hope that this film will generate awareness in the importance of protecting our environment in areas where we fly.

Finally, I would like to thank everybody for listening, for investing in Volaris, and supporting the efforts of this management, which keeps on doing efforts to improve performance. Thank you very much for all your support and hope you have a great weekend.

Operator

This does conclude today's Volaris second quarter 2019 financial results conference call. You may now disconnect your lines and everyone have a great day.

Duration: 51 minutes

Call participants:

Maria Elena Rodriguez -- Director of Corporate Finance and Investor Relations 

Enrique Beltranena -- President and Chief Executive Officer

Holger Blankenstein -- Airline Executive Vice President

Sonia Jerez -- Vice President and Chief Financial Officer

Duane Pfennigwerth -- Evercore ISI -- Analyst

Michael Linenberg -- Deutsche Bank -- Analyst

Josh Milberg -- Morgan Stanley -- Analyst

Conor Cunningham -- Cowen and Company -- Analyst

Rogerio Araujo -- UBS -- Analyst

Stephen Trent -- Citigroup -- Analyst

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