Last week, the Mexican ultra-low-cost carrier Volaris released the second quarter of 2022 financial results and had its earnings call transcript. During the call, the airline’s management addressed the Category 2 impact on Volaris. Mexico has been downgraded to Category 2 status by the Federal Aviation Administration (FAA) since May last year.
Category 2 impact
Mexico was downgraded to Category 2 status by the FAA in May 2021 after the Mexican Government failed to meet the International Civil Aviation Organization (ICAO) safety standards. This has directly impacted the operations of Mexican airlines that fly to the United States, such as Volaris.
While Mexico remains downgraded, the Mexican airlines can’t add new routes, frequencies, and aircraft to the United States. They are effectively frozen to everything they had approved prior to the downgrade.
There’s no official timeline of when Mexico would be able to regain its Category 1 status. Nonetheless, it is widely accepted Mexico could remain downgraded for the remainder of 2022 after the country failed the latest Technical Review last month.
Addressing the impact
While speaking in the airline’s earnings call, Volaris CEO Enrique Belpranena addressed the topic. He said,
“While our international capacity growth is constrained by category 2, we still have levers available to improve our current US capacity, including increasing frequencies and deploying two additional aircraft that we are still allowed under the FAA’s limit. Our presence remains strong in the US as we are the third largest non-U.S. operator in the L.A. and Chicago markets.
However, our growth has been limited in this market due to Mexico’s category to rating, which disappointingly did not progress in the last FAA audit of our aviation authority.
For the second half of the year, we still have space for two additional aircraft to operate from Mexico to the US. In the medium term, we are adjusting our network growth plans to the US, given the recent CAT 2 results. Long-term growth opportunities are not in jeopardy. Volaris has more than 300 potential new routes not yet serviced.”
Volaris’ first-half results
During the first half of 2022, Volaris posted a US$98 million net loss due to the impact of higher fuel prices and economic uncertainty.
The airline is having a record traffic number. It carried 14.4 million passengers during the first six months of the year, a 38% increase compared to 2021 when the airline fully rebounded from the COVID-19 pandemic.
Volaris’ total operating revenues were worth US$1.25 billion, a 41.5% increase compared to 2021, driven by higher capacity, healthy load factors, and solid unit revenue.
Volaris’ total operating costs for the quarter totaled US$710 million, an increase of 61% primarily brought by rising fuel prices. During that time, the average economic fuel price rose by 107% to US$4.4 per gallon. Volaris increased fares to cover some of the cost of rising fuel prices and, in certain cases, reassigned flights to more lucrative routes. It effectively managed other expenses as well.
Enrique Beltranena, Volaris Chief Executive Officer, said,
“Offsetting the hit from this highest economic fuel price was quite a challenge. Nevertheless, the company did pass through $160 million or 75% of this impact to the customers versus 2019. During the quarter, we experienced several reactions to our efforts to pass through fuel prices. On US routes, passengers absorbed higher prices at a slightly lower load factor. On our exclusive routes competed only with the buses, which account for 46% of our routes, we were also able to price more aggressively with little impact on volumes. For the second half of 2022, we will be more sensitive to stimulating load factors on our trunk routes while pushing for pass through in markets that are sustaining volumes at higher prices.”
Daniel Martínez Garbuno is a Mexican journalist. He has specialized in the air industry working mainly for A21, a Mexican media outlet focused entirely on the aviation world. He has also published on other sites like Simple Flying, Roads & Kingdoms, Proceso, El Economista, Buzos de la Noticia, Contenido, and Notimex.