Why This Ultra-Low Cost Airline Could Be Poised For Large Growth

An analysis of the Mexican airline industry has BofA Securities bullish on Volaris VLRS.

The Volaris Analyst: Murilo Freiberger initiated coverage on shares of Volaris with a Buy rating and $27 price target. 

The Volaris Takeaways: Volaris was founded as an ultra-low-cost airline by the same groups that founded Spirit SAVE, Frontier ULCC and Wizz WZZZY, indicating a solid team at the helm, Freiberger said in  Wednesday note. 

Volaris’ fleet is built for efficiency, the analyst said: its average age is 5.3 years, which reduces fuel and maintenance costs; it consists of a single type of plane, allowing for lower training costs and variation in spare parts; and finally, it consistently delivers some of the highest load factors in the industry, allowing for a greater dilution of fixed costs. 

Volaris’ exceptional balance sheet aided the company in gaining market share over the last year, unlike Aeromexico GRPAQ, which filed for Chapter 11 in June, and Interjet, which has had 92% of its fleet repossessed by lessors, the analyst said.

The key driver of Volaris’ customer acquisition is its ability to charge the lowest fares due to its ultra-low cost per seat, Freiberger said.

Looking at the Mexican travel industry as a whole, bus revenues are 29.5 times that of airlines, meaning conversion of 1% of bus travelers to airlines represents a 67% increase in airline revenues, the analyst said.

This high sensitivity coupled with Volaris’ value proposition means room for rapid growth, Freiberger said.

Finally, Volaris has grown its top line at a 15% CAGR over the last 10 years, according to BofA. 

VLRS Price Action: Shares of Volaris were up 4.64% at $21.18 at last check Wednesday.