Mexico’s largest airline, Volaris, sees both benefits and drawbacks to the issues affecting Pratt & Whitney engines on some of its Airbus planes.
Mandatory inspections of certain geared turbofan engines on A320neo and A321neo aircraft have cut the discounter’s growth outlook by 3 percentage points to roughly 10% this year, CEO Enrique Beltranena said during Volaris’ third-quarter earnings call Wednesday. The reduction was more severe in September when the airline was forced to cut capacity, measured in available seat miles, by 8% resulting in an estimated revenue loss of $18 million.
“It’s fair to assume that we will be forced to shrink our capacity in 2024 as a result of these engine issues,” Beltranena said. Nearly 13% of the carrier’s fleet of 126 aircraft, or 16 A320neo-family planes, are currently parked for engine inspections.
Volaris plans to partially offset the grounded aircraft, and delays to new planes from Airbus, by extending leases on 18 A320-family aircraft that are scheduled to return to lessors in 2024 and 2025.
A government-mandated reduction in aircraft movements — a landing or takeoff is considered one movement — at Mexico City’s international airport in January will also force some capacity reduction at Volaris.
But capacity cuts could, in the end, be something of a blessing for Volaris. Many believe there is too much capacity in the Mexican domestic market because the country’s airlines continued to grow despite being unable to add new U.S. flights because of Mexico’s aviation safety rating. The way to address too much capacity is to fly, or at least grow, less. The engine issues are forcing Volaris, and likely fellow Airbus-operator Viva Aerobus, to remove some capacity from the market.
In addition, the upgrade of Mexico’s safety rating by the U.S. in September is allowing all Mexican airlines to redeploy aircraft — and capacity — to more lucrative transborder routes. Aeromexico and Viva Aerobus have already announced a flurry of new routes, and Volaris plans to redeploy four aircraft currently flying domestic routes to Mexico City’s international airport to U.S. routes in December.
“The next year has the potential to deliver improved performance compared to 2023,” Beltranena said.
That’s good news for Volaris. The airline, in part due to the capacity situation in Mexico, has lagged its historic financial performance. Its 5% operating margin in the third quarter was flat year-over-year but down dramatically from 18% in 2019. It posted an operating profit of $39 million on revenue of $848 million, the latter was up 10.3% compared to last year.
Total unit revenues, or TRASM, increased 1.8% while adjusted unit costs excluding fuel surged 20.1% in the third quarter. The latter was negatively affected by the strong Mexican peso, which added roughly 8 points of adjusted unit costs excluding fuel growth.
Volaris expects some financial compensation from P&W-parent RTX for the costs related to the geared turbofan engine issues, Beltranena said. This is likely to be reflected in the airline’s December quarter results.
“Volaris had a difficult [third quarter] and faces a challenging operating environment in the months ahead,” TD Cowen analyst Helane Becker wrote Wednesday. “However, earnings have a good chance of improving given lower variable costs, compensation from RTX, and constrained capacity in Mexico pushing unit revenue higher.”
Travel demand in Mexico is “solid” through the year-end holiday season, and forecast to remain strong into next year, Volaris Executive Vice President of Airline Commercial and Operations Holger Blankenstein said.
Volaris executives also dismissed potential competition from state-owned startup Mexicana that government officials say will begin flying in December. They said the new budget airline will likely only overlap with 1-2% of Volaris’ capacity.
Volaris maintains its forecast of full-year revenues of around $3.2 billion despite lower capacity growth.