For most airlines, 2021 was the beginning of a multiyear recovery from the ravages of the COVID-19 pandemic. However, for Volaris (VLRS 0.35%), revenue and earnings surged well beyond pre-pandemic levels over the past year. On Thursday evening, the Mexican budget airline reported another quarter of excellent results to close out the year.
Rapid growth continues
Over the past two years, Volaris has solidified its position as the largest and strongest airline in Mexico. It gained market share as key rivals were forced to shrink, enabling the company to emerge with higher market share and capitalize on a robust demand recovery beginning last spring.
In the second quarter of 2021, Volaris' revenue jumped 38% compared to Q2 2019, as revenue per available seat mile (RASM) rose 22%. A quarter later, RASM growth moderated to 12%, but the company still posted a 35% revenue gain relative to the third quarter of 2019.
This revenue momentum continued last quarter. Volaris posted a stunning 43% revenue increase over the fourth quarter of 2019 on 27% capacity growth and a 13% uptick in RASM. Total revenue reached 14 billion pesos ($678 million).
Excellent margin performance
Back in October, Volaris' management projected that profitability would narrow somewhat compared to 2019 in the fourth quarter. The company estimated that its adjusted earnings before interest, taxes, depreciation, amortization, and rent (EBITDAR) margin would come in between 31% and 34%, down from 36.5% two years earlier.
Volaris outperformed that forecast, thanks to its strong RASM growth. The carrier's adjusted EBITDAR margin improved slightly to 37% last quarter. That enabled the company to grow adjusted net income by 21% over the strong profit it earned in Q4 2019. Adjusted earnings per American depositary share reached $0.65, easily beating analysts' estimates.
Expansion plans move forward
As of January 2021, Volaris was planning for very conservative near-term fleet expansion, because of the pandemic. At the time, its fleet plan called for ending 2021 with 87 jets, up from 86 at the beginning of the year and 82 at the end of 2019. The fleet was scheduled to grow to 93 jets by the end of 2022.
However, as its business gained traction during 2021, Volaris adopted more aggressive growth plans. The airline ultimately grew its fleet to 101 aircraft by year-end. It plans for more of the same in 2022, aiming to exit the year with 115 jets, assuming timely deliveries from Airbus.
Based on this fleet plan, Volaris expects to expand capacity by more than 20% year over year, enabling revenue to grow to between $2.6 billion and $2.8 billion, up from $2.2 billion in 2021. Furthermore, Volaris ordered 39 more A321neo jets from Airbus last quarter. It now has 132 jets on firm order: 33 A320neos and 99 A321neos.
Don't fear the volatility
Oil prices have surged dramatically in recent months. That could weigh on profitability in the near term, as fuel is by far Volaris' largest expense. Last year, the company spent 28% of its revenue on fuel.
Investors shouldn't worry too much about this cost headwind. Volaris is rapidly upgrading its fleet to next-generation A320neos and A321neos that are extremely fuel efficient, mitigating the impact of higher prices. Furthermore, Volaris has a solid balance sheet -- far stronger than any of its competitors -- giving it the ability to withstand short-term earnings headwinds.
Over the past decade, Volaris has repeatedly emerged stronger from periods of earnings volatility. The same will probably be true now, setting the stage for strong revenue and earnings growth in the years to come.