What happened
Shares of Mexican airline Controladora Vuela Co Avcn SA CV (VLRS 5.74%) plunged as much as 20.3% in trading Monday after announcing earnings that led to fears of growing competition. At 12:25 p.m. EDT shares were still down 16.6% on the day.
So what
First-quarter 2018 operating revenue rose 2.7% to 5.85 billion pesos ($309 million as of April 23, 2018), but revenue per seat mile fell 7.7% to 1.157 pesos, which indicates low demand or greater competition. The lower revenue per miles led to a loss of 1.118 billion pesos, or $0.60 per American Depositary Share -- much worse than the $0.18 loss analysts were expecting.
Image source: Getty Images.
A 2017 open skies agreement between the U.S. and Mexico has created competition in Mexico and led to declining prices. It also doesn't help that fuel costs are rising, which will increase operating costs. Conditions don't seem ripe for profits in the Mexican airline business right now.
Now what
The increase in competition isn't going to change anytime soon given the newly opened skies between the U.S. and Mexico. For now, it doesn't appear that oil prices will be going down either.
I don't see any reason to jump into Controladora Vuela's shares today given the operational pressure and growing financial losses. Next quarter, it would be outstanding if the company could return to breakeven, and I'll stay out of this airline stock until that happens.
