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2 Ways to Invest in Rising Mexican Air Travel

By Adam Levine-Weinberg - Jan 17, 2016 at 8:10AM

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Volaris and Delta Air Lines are both positioning themselves to profit from rising air travel to, from, and within Mexico.

The U.S. air travel market has been mature for many years. With demand typically rising at a low-single-digit rate, most airlines aren't growing very quickly -- and those that are expanding face a potential competitive backlash if they threaten the biggest airlines' market share.

The Mexican aviation market's growth is accelerating. Image source: Wikimedia Commons user Jean-Philippe Boulet.

However, that's not a problem south of the border. In Mexico, domestic airline passenger traffic has posted double-digit year-over-year growth every month since February. International passenger traffic to Mexico has also risen at a consistent double-digit rate since April.

Fortunately, there are two great ways to bet on the continued growth of the Mexican air travel market. Fast-growing Mexican budget carrier Volaris (VLRS -2.29%) has the lowest costs of any airline in the Western Hemisphere and is positioned to capture a large share of the growth in leisure travel. Meanwhile, Delta Air Lines (DAL -1.60%) and its partner Aeromexico will profit from growing business travel.

Delta Air Lines moves into Mexico
Delta's management sees Mexico as a key growth market because its economy is on a much steadier footing than many other emerging markets. Furthermore, Mexico and the U.S. recently signed a new air service treaty. If it is ratified, the agreement will remove restrictions on which airlines can fly which routes, opening up new growth opportunities.

To take advantage of this growth, Delta has acquired a 17% stake in top Mexican airline Aeromexico. In November, it announced plans to launch a tender offer to increase its ownership stake to 49% of the company. Delta also hopes to form an immunized joint venture with Aeromexico this year, allowing the two carriers to coordinate on scheduling and pricing.

Delta is partnering with Aeromexico to capitalize on Mexican market growth. Image source: The Motley Fool.

The Aeromexico-Delta joint venture would have the leading market share in the U.S.-Mexico transborder market. By cooperating, Delta and Aeromexico would be able to increase their profitability on these routes. Meanwhile, the liberalization of the market will allow the two carriers to accelerate the growth of their joint venture.

Delta also plans to act as a management consultant of sorts to help Aeromexico increase its profit margin. This would accelerate its earnings growth, increasing the value of Delta's equity stake. All the while, Delta and Aeromexico will benefit from rising air travel demand in Mexico, particularly among business travelers.

Volaris delivers strong growth
At the other end of the spectrum, Volaris has built its business to attract the most price-sensitive travelers in the market. It has steadily reduced its costs in order to offer extremely low fares and thereby convince customers to fly rather than travel by bus. Its average one-way fare through the first nine months of 2015 was less than $70.

Volaris has been a huge beneficiary of falling oil prices. Cheap oil allows Volaris to keep its fares low. Since its customers are so price-sensitive, this is driving tremendous growth in its passenger traffic.

In 2015, Volaris carried 22% more passengers than it did a year earlier. During the second half of the year, its growth rate was above 25%.

Volaris has been ramping up its growth rate recently. Image source: The Motley Fool.

Volaris expects the strong demand to continue in 2016 and beyond. Over the past year, it has dramatically increased its growth plans for 2016 and 2017. This should allow it to keep growing traffic at a roughly 20% annual rate.

Rising demand is also allowing Volaris to add larger planes like the A321 to its fleet. Since the A321 has lower unit costs than the A319s and A320s in Volaris' fleet, this growth will drive further unit-cost reductions. That will enhance the company's competitive advantage, creating a virtuous cycle of falling unit costs and accelerating growth.

Two great options
Delta and Volaris are both highly profitable companies that are poised to become even more profitable in 2016 thanks to low oil prices. This makes them compelling stocks for investors looking to cash in on the growth of air travel in Mexico.

Volaris has tremendous growth potential and its performance is most directly tied to the future growth of Mexico's aviation market. On the other hand, it has experienced sharp swings in its profitability in recent years, making it a relatively risky stock.

Delta has less upside but offers more safety. As a global airline, its fortunes depend on its success in numerous countries (primarily the U.S.). However, assuming its investment in Aeromexico is approved, Mexico will become one of its most important growth markets.

Adam Levine-Weinberg owns shares of Volaris and is long June 2016 $12.5 calls on Volaris, short June 2016 $20 calls on Volaris, and long January 2017 $40 calls on Delta Air Lines, The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Delta Air Lines, Inc. Stock Quote
Delta Air Lines, Inc.
$33.21 (-1.60%) $0.54
Controladora Vuela Compania de Aviacion, S.A.B. de C.V. Stock Quote
Controladora Vuela Compania de Aviacion, S.A.B. de C.V.
$10.24 (-2.29%) $0.24

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