After plunging last spring as the COVID-19 pandemic rampaged out of control, airline stocks have made a big comeback over the past year. Yet many airlines are still losing money -- and virtually all of them are posting results significantly worse than they did before the pandemic. The airline stock recovery has been driven by investors' optimism about the future more than airlines' near-term results.
However, one airline has already made a full recovery from the pandemic. Last week, Volaris (VLRS +0.00%) reported record earnings for the second quarter. The Mexican budget airline expects this earnings momentum to continue into the second half of 2021, too, justifying the epic rally that helped Volaris stock reach an all-time high earlier this month.
Volaris stock performance, data by YCharts.
Guidance rising
Despite seeing some green shoots in its business beginning late last year, Volaris recorded a substantial loss in the first quarter of 2021. Back in April, management projected that results would improve significantly in the second quarter.
First, Volaris planned to increase capacity by 10% relative to the same period in 2019, compared to a small capacity decrease in Q1. Growth tends to reduce unit costs, whereas capacity reductions put pressure on unit costs. Second, Volaris estimated that revenue per available seat mile (RASM) would be roughly in line with 2019 levels in the second quarter, whereas RASM fell 4% from 2019 in the first quarter.
A month later, the airline raised its forecast dramatically. It said it planned to increase capacity by as much as 13% compared to 2019. Moreover, the company estimated that rather than being in line with 2019 levels, RASM would increase by 8% to 10%. The improved revenue outlook allowed Volaris to increase its margin guidance and cash flow projections, as well.
A huge earnings beat
Volaris' May and June operating reports showed that demand continued to accelerate. The carrier increased capacity by 17% and 18% over 2019 levels in May and June, respectively. Despite that rapid growth, its load factor -- the percentage of seats filled with paying customers -- remained flat in the 88% to 89% range.
Sure enough, Volaris' second-quarter results easily surpassed the company's updated forecasts. Most notably, RASM surged by an astounding 21.8% relative to Q2 2019. Meanwhile, unit costs decreased slightly, as lower jet fuel prices and better fuel efficiency more than offset a 13.6% jump in non-fuel unit costs.
Image source: Volaris.
This enabled Volaris to post a record pre-tax profit of 2.2 billion pesos ($111 million), or $0.67 per American depositary share. (On average, analysts were expecting a small loss.) Volaris' pre-tax margin reached a remarkable 19.1%. Excluding an $8 million foreign exchange gain, it would have recorded a 17.7% pre-tax margin. For comparison, the company posted a meager 2.4% pre-tax margin in the second quarter of 2019.
What comes next?
During Volaris' recent earnings call, management noted strong bookings for the summer season. The airline's advance bookings for the fall still trail 2019 levels, but Volaris has started to close that gap using various promotions to stimulate demand.
In the near term, the spread of the COVID-19 delta variant could interrupt Volaris' recovery. However, the recent demand rebound has enabled the airline to bolster its cash reserves, putting it in even better position to weather future downturns.
In the long run, Volaris will benefit from a significantly improved competitive position. Top rival Aeromexico filed for bankruptcy protection because of the pandemic and dramatically shrank its order book, effectively conceding that it can't compete with Volaris and VivaAerobus (a smaller Mexican budget airline). Furthermore, Interjet -- once Mexico's No. 2 airline -- went out of business last year.
Thanks to its rivals' woes, Volaris has been able to expand rapidly at slot-constrained Mexico City International Airport. Its domestic market share has surpassed 38%, boosting its pricing power. Most importantly, air travel is just taking off in Mexico, giving Volaris massive growth opportunities. Investors should expect plenty of volatility ahead, but Volaris stock still has lots of long-term potential.
