Volaris - Q2 2023
July 25, 2023
Transcript
Operator (participant)
Good morning, everyone. Thank you for standing by. Welcome to Volaris' Second Quarter 2023 Financial Results Conference Call. All lines are in a listen-only mode. Following the company's presentation, we will open the call for your questions and answers. Please note that we are recording this event. This event is also being broadcast live via a webcast, and may be accessed through the Volaris website. Those following the presentation via the webcast may post their questions on the platform. The management team will answer them during this call, or the Volaris investor relations team will answer them after the conference is finished. To send your questions via the webcast platform, click on the ask the question button and type your inquiry. At this point, I would like to turn the call over to Ricardo Martinez, Investor Relations Director. Please go ahead, Ricardo.
Ricardo Martinez (Investor Relations Director)
Good morning, and thank you for joining the call. With us today are our President and CEO, Enrique Beltranena, our Airline Executive Vice President, Holger Blankenstein, and our Chief Financial Officer, Jaime Pous. They will be discussing the company's second quarter 2022 results. Afterward, we will move on to your questions. Please note that this call is for investors and analysts only. Before we begin, please remember that this call may include forward-looking statements within the meaning of applicable securities laws. Forward-looking statements are subject to several factors that could cause the company's results to differ materially from expectations, as described in the company's filings with the United States SEC and Mexico's CNBV. These statements speak only as of the date they are made, and Volaris undertakes no obligation to update or modify any forward-looking statements.
As in our earnings per release, our numbers are in U.S. dollars compared to the second quarter of 2022, unless otherwise noted. With that, I will turn the call over to Enrique.
Enrique Beltranena (President and CEO)
Thank you, Ricardo, and everyone for joining us today. During the quarter, our company's performance was aligned with our projected full-year outlook, supported by favorable macroeconomic conditions, including lower jet fuel costs and a stronger Mexican peso. We are seeing solid bookings for the summer months and remain confident in the resilience of our VFR passenger base in Mexico and the robust demand we see in Central America and the United States. We eagerly await the return of Mexico's Category 1 status and the growth in the domestic market resulting from the Mexico-U.S. nearshoring. We would like to start by reiterating our revenue and EBITDA margin guidance for the year.
We will continue to focus on delivering total operating revenue between $3.2 billion-$3.4 billion, and an EBITDA margin of 21%-31%, which is an increase of 8 to 10 percentage points versus 2022. During this last quarter, we moved capacity from the Mexican domestic market to our Central American Air Operator Certificates, or AOCs, alleviating the temporary overcapacity in Mexico and achieving a more balanced supply and demand. We consciously reduced a few points of market share in the domestic Mexican market to achieve higher network profitability. Throughout the second quarter, we maintained total revenue per passenger flat, taking advantage of strong ancillary revenue to offset domestic base fare reductions. We maintained healthy load factors. The second quarter of 2023 featured hallmark progress for our ancillary strategy.
Our ancillary revenues as a percentage of total revenues were 49%, up from 40% in the second quarter of 2022, and 47% in the first quarter of 2023. The reduction of base fares showed the strength of our ultra-low-cost carrier model, stimulating volume through lower base fares. The load factor remained healthy in the mid-eighties as we managed pricing in the domestic market to drive volumes. Passengers have responded in kind, resulting in RPMs growing just ahead of ASMs year to date. International and pricing there remained robust, showcasing an exceptional response to our increased capacity in Central America for routes to the U.S. and Mexico. Our plan for the second half of this year includes incorporating additional capacity into this market, mainly to serve the growing VFR demand between Central America and the United States.
Continuing with international year to date, we have an improvement of 6.5 percentage points on load factor, climbing from high 70s-mid 80s, given strong demand in VFR markets in California, Texas, and Chicago. International passengers during the semester grew 33.5% versus the same period in 2022. This quarter was focused on preparation for the future as we anticipate Mexico's imminent recovery of Category 1 status with the U.S. Our team has been proactive by planning to implement network changes in Mexico, Central America, and later in the year in the cross-border market to the U.S. These adjustments will enable us to relocate some of our growth towards a robust international market. Moving into our results from the quarter.
ASMs grew 18% compared to the second quarter of 2022, including a 13% increase in the Mexican domestic market and a 30% increase in our international market. Initially, we planned to return eight aircraft this year, but decided to extend leases for six of them. This decision will allow us to better handle any operational challenges related to engine availability and aircraft delivery delays during the peak summer and December holiday seasons. While year-to-date, our ASM growth remains ahead of our 10% guidance for the entire year, this trend is attributable to our strategy of extending six aircraft redeliveries. As such, we now expect ASMs to grow around 13% in 2023, including the capacity we will deploy to the U.S. upon Category 1 recovery.
Turning back to demand, TRASM for the second quarter was $0.0792, a 3% increase compared to this year's first quarter, and a 4% reduction compared to the second quarter of last year. Our overall load factor for the second quarter was 84.6%, down 1 percentage point year-on-year. April started with a healthy load factor of 85.8%, our second-most robust result for that month in the past decade, even considering flat traffic for Holy Week, the week-long Catholic observance, and the Eastern holiday in the first week of the month. Load factors for May and June were sequentially softer at 84.5% and 83.3% respectively. However, we have identified certain temporary or one-off factors that influenced this moderation.
Late in May, local and social media circulated an anonymous, unsigned letter warning of a potential strike and work stoppage by Volaris flight crews in June. This story provided further reverberations in the local press. In addition, the Mexican aviation industry has been dealing with its Category 2 downgrade from the FAA for over two years. While there are signs of regaining Category 1 status soon, the restoration process has been long and burdensome. Mexico's aviation authorities have stated that the government has completed all the necessary procedures and met the requirements set by the FAA. Once the U.S. authorities announce the upgrade, we are prepared to utilize the flexibility in our business model to redeploy approximately 5% of our total capacity to international markets in the fourth quarter. This strategic move will alleviate pressure on those markets while providing the much-needed capacity for U.S. routes.
We will also reactivate other important strategic levers upon the return of Category 1. One of our top priorities is resuming the codeshare agreement with Frontier, which will strengthen our network and provide enhanced travel options for our passengers. Another upside of the Category 1 restoration is the opportunity to utilize the 35 NEOs delivered to us since Mexico was downgraded. These aircraft are primarily allocated for domestic operations, meaning we are not fully capitalizing on their efficiencies. Once Category 1 is reinstated, we can leverage these modern and fuel-efficient aircraft on longer routes. This strategic move will optimize fuel consumption and strengthen our competitive cost advantage. It aligns with our commitment to sustainable travel. Regarding cost, our CASM for the second quarter was $0.0740, making a notable 13% decrease compared to the same period of last year.
This reduction is attributable to the stabilization of fuel costs from last year's high levels. CASM ex fuel stood at $0.0482 for the quarter, in line with our full year expectations. This achievement was attained despite the strong appreciation of the Mexican peso, non-engine availability costs, and aircraft delivery delays. Moving now to our fleet growth plan, anchored around our outstanding 143 all-neo aircraft order book, which includes 117 A321 aircraft. This order was established along with the Indigo Group in 2017. During the second quarter, we took delivery of our first aircraft. This is the start of an era, providing meaningful fleet cost ownership reduction, and sets the stage for many benefits in the coming years, like low cost going lower, while our environmental impact will also be reduced.
At this time, I would like to highlight significant recent commercial developments that speak to our growth strategy's evolution in the future. We announced 40 new domestic routes in Mexico, 33 of which presently have no other air service. We launched our Annual Pass, an all-you-can-fly annual membership program. We are now the only airline in Latin America with an offering of this nature. We founded Volaris to democratize flying and continue to pursue our mission of introducing bus riders to flying. To date, we have served over 10 million first-time flyers, many of whom travel with us again multiple times yearly. At Volaris, we prioritize bus switching and loyal passengers, so we have partnered with OXXO, the largest retailer in Mexico, for our affinity program. We have improved our ability to convert first-time passengers into loyal customers.
Our low fares and new affinity program are crucial in growing and retaining our customer base. Our passengers repeatedly travel with us for a reason. During the second quarter, among all airlines in the year's first half, Volaris registered the lowest complaint ratio at PROFECO, Mexico's Consumer Protection Agency, among all airlines in the year's first half. With this achievement, Volaris demonstrates its commitment to quality and customer experience. I'm glad to inform you that Volaris and Indigo Partners, Frontier, and Wizz Air announced an investment in CleanJoule, a U.S.-based startup focused on accelerating sustainable aviation fuel production. Likewise, in further support of our fleet plan and sustainability program, we announced the selection of Pratt & Whitney eco-efficient GTF engines for 64 Airbus A321neo family aircraft in June. This agreement also includes a long-term maintenance contract.
Now, I will turn the call over to Holger to explain our market evolution and commercial innovations in greater detail. Please, Holger, go ahead.
Holger Blankenstein (EVP of Airline)
Thank you, Enrique, and good morning. I am pleased to share that the second quarter of 2023 marked a period of continued robust international growth and an exciting announcement of new domestic routes to expand our network and bolster ancillary performance. Throughout this quarter, we have implemented various initiatives to enhance both the conversion of bus travelers to air passengers and increase passenger repetitiveness. Regarding our second quarter results, I would like to highlight that I achieved 7 percentage points of the 18% capacity growth by driving superior utilization of our fleet, particularly on longer routes. We saw remarkable progress with a daily average of 909,000 Available Seat Miles per aircraft per day, up from 835,000 in the same quarter last year. Additionally, I achieved 13.4 daily block hours.
TRASM experienced a slight decrease in the second quarter due to reduced base fares on domestic routes, aiming to recover volumes. However, this impact was offset by solid ancillary performance. As a result, total revenue per passenger reached $93.4, higher than the $92.6 achieved in the second quarter of 2022. Total revenues per departure increased by 3%, while the overall load factor for the second quarter fell 1 percentage point year-on-year. The domestic market saw a 3.5 percentage point reduction, nearly offset by robust 4.9 percentage points growth in the international market. Currently, we are facing a short-term excess of capacity, and to address this, we have taken action to reduce capacity on domestic trunk routes.
We are also reshuffling our domestic capacity to alleviate pressure on specific higher density routes and prepare for redeployment to the Central American market and the Mexico to U.S. routes upon the recovery of Category 1. We have encountered infrastructure constraints, particularly at Mexico City International Airport, where our slots have been reduced. In June, we announced 14 new domestic routes to connect underserved Mexican markets, aiming to alleviate this pressure and provide bus customers with a new alternative for travel. This expansion seeks to replicate our successful models in serving VFR and leisure traffic in Tijuana and our strong base in Guadalajara. Mexico's position as the largest trading partner to the U.S. and the emergence of nearshoring, create a favorable economic environment with higher employment, better wages, increased consumer spending, and a stronger peso.
With Volaris' strategic network concentration in the northern and central parts of the country, we are well-positioned to benefit from these trends and anticipate further growth and market presence in the medium term. All the newly introduced domestic routes began operating in the first week of July, and we are pleased with the early turnout in traffic and loads. In addition to our success in the domestic market, we continue to experience strong growth in Central America. Sales to U.S. routes in this region rose by 76% in June compared to last year's levels, and passenger volume increased by 32% in the first half of 2023. To capitalize on the growing demand, we have a strategic advantage with our two Central American AOCs.
As part of our plan, we aim to allocate up to three additional aircraft to this region during the second half of the year, raising the total count to 9. Our competitors in Mexico lack alternative AOCs, leaving them with no other options to deploy additional capacity outside Mexico. Far this year, we have opened international routes from El Salvador to Houston, Miami, Oakland, Ontario, and California, and Guatemala to Chicago. This brings us up to 24 routes operated by our Central American AOCs, and more than 1 million passengers transported year to date. Turning our focus to ancillary revenue, we experienced remarkable adoption of our ancillary products in the second quarter, with our cutting-edge approach driving a 25% year-over-year increase, and a 10% increase versus the first quarter of 2023, reaching a record of $46 per passenger.
Ancillary revenue contributed over $9 per passenger more than in the second quarter of 2022. Ancillaries climbed to 49%, up 9.6 percentage points year-on-year, as a proportion of our total operating revenues. These impressive results were achieved through innovative offerings, such as our v.club membership program, which has seen a doubling in sales compared to the first quarter. Introducing the Annual Pass, a membership that provides unlimited flights for a yearly fee, will allow us to enhance our load factors for last-minute bookings and sell dispersed inventory effectively. The Annual Pass provides customers with convenient and flexible travel options, while maximizing the utilization of available seats on our flights. We will continue to develop our YA VAS travel packaging program to further contribute to ancillary growth.
Additionally, our affinity program through OXXO Partners has launched, making it one of the most extensive programs in Latin America. This program aims to attract more first-time flyers and incentivize repeat passengers, a trend that we have observed increasing. Looking ahead, we are optimistic about our solid bookings for the summer months, supported by attractive low fares in our domestic markets. We anticipate travel improvement year-over-year for the second half of the year. In conclusion, we remain confident in the resilience of our VFR passenger base in Mexico. At the same time, we will continue to experience robust demand in Central America and the United States. We eagerly await the return of Mexico's Category 1 status, and are well-prepared to seize the opportunities it will bring.
For the second half of the year, the seasonally stronger semester, we are looking forward to several top-line tailwind, including solid booking curves, stable international fares, a return of Category 1, strong Central American growth, and more solid domestic network, and a ramp-up of ancillary projects, all contributing to lifting ancillary revenues towards 50% of total operating revenues. I will now pass the call over to Jaime to discuss our financial performance for the quarter. Thank you.
Jaime Pous (CFO)
Thanks, Holger. In the second quarter of 2023, Volaris posted a 27.1% EBITDAR margin, an improvement of 11.5 percentage points. During the quarter, fuel costs normalized from last year's spike, and we are not forecasting disruptions in the jet fuel market for the remainder of 2023, with only seasonality driving movements in price levels. For the full year, we now expect Gulf Coast jet fuel prices in the range of $2.55-$2.65 per gallon, versus a range of $3.00-$3.10 in our original outlook. EBITDAR for the quarter totaled $212 million, nearly double the prior year. We maintain our full-year EBITDAR margin guidance in the 29%-31% range.
EBIT total $51 million, with an EBIT margin of 6.5%, up from a -2.8% in the second quarter of 2022. Net income was $6 million, translating to earnings per ADS of $0.05. Total operating revenues for the second quarter amounted to $792 million, a 13% increase compared to 2022. For the full year, we maintain our top-line guidance of $3.2 billion-$3.4 billion, with implied revenue growth of 12%-19% versus 2022. As Enrique explained, we now expect full-year capacity to increase by around 13%, up from 10% in our original outlook.
While the appreciation of the Mexican peso positively impacted our TRASM by $0.78, our CASM was directly impacted by $0.19 against the second quarter of 2022. Ex-fuel unit cost increased as budget driven by the Mexican peso appreciation and delivery cost, which will peak in 2023 and 2024, and gradually return to 2019 levels by 2027. We maintain our 2023 CASM ex-fuel guidance to be in the range of $0.047-$0.040. Contrary to what has happened in other jurisdictions, Volaris has controlled labor costs without any significant bump, and has kept its local currency increase in line with the Mexican inflation rate.
In addition, we are budgeting to improve our full-time equivalent employees per aircraft at the end of the year to 58 FTEs, the same level we had in 2019, before starting to fill the void created by airlines abandoning the market. We are committed to leveraging our cost efficiency, strength, and cost efficiency as a primarily competitive advantage. Our cost performance give us confidence that during the year's second half, we can compensate for the temporary unit revenue headwinds and OEM-related fleet costs, while generating profitability aligned with our full year goals. Total CASM came to $0.0740 for the second quarter, falling 12.9% compared to the second quarter of 2022. Our CASM ex-fuel for the quarter was $0.0482, a 14.8% yearly increase.
Our adjusted CASM, excluding fuel expenses and aircraft engine variable leases expenses or delivery costs and sale and leaseback gains... total $0.0443, compared to $0.0403 in the second quarter of 2022, an increase of 10.1%. Moving to fleet. During the quarter, Volaris added the three aircraft, bringing our total number of aircraft to 123. We have 70 Airbus NEOs, comprising 57% of all aircraft, and are projecting to close the year at 127 aircraft, considering an Airbus potential delay of at least two aircraft until 2024. Seats per departure rose to 194 in the second quarter, a 3% increase year-over-year, and our fleet had an average age of 5.5 years.
In the quarter, we booked variable lease expenses of $40 million, netted by sale and lease gains of $6 million. Volaris finished the quarter with a total cash level of $655 million, representing 21% of the last 12 months operating revenue. The cash flow provided by operating activities in the second quarter was $159 million. Cash flow used in investing activities was $102 million, and cash flow used in financing activities was $109 million. CapEx, net of pre-delivery payments, totaled $54 million, in line with our full year guidance of $300 million. Our strategy to maintain operational reliability drove investments of $35 million in acquiring the spare engines. The capitalized major maintenance events expenses were $22 million for the quarter.
At the end of the second quarter, our net debt to EBITDA ratio was 3.5x, down from 3.8x at the end of the first quarter. Although our focus remains on deleveraging in the midterm, we expect our net debt to EBITDA ratio to likely surpass the initial projections for the entire year, likely reaching approximately 2.8x. This outcome is primarily influenced by the fleet-related difficulties we previously addressed. Now I will turn the call over to Enrique for closing remarks.
Enrique Beltranena (President and CEO)
Thank you, Jaime. In summary, in the second quarter of 2023, we marked significant achievements for Volaris, showcasing the advancement of our diversified growth strategy and reinforcing our position as the leading Mexican airline. Our world-class cost has been instrumental in creating opportunities for sustained growth. As a result, we are on track to achieve our annual targets. Besides the above, we'll continue exercising prudence in a capacity and being conservative with our balance sheet, which will allow us to anticipate challenges and capitalize on opportunities in our markets in ways few global operators can. We have been, and continue to position Volaris for the long term. As this translates into future growth, we will drive returns for our shareholders and provide a solid long-term investment opportunity.
I want to close these remarks by reinforcing our commitment to double revenue, EBITDA, and free cash flow from 2019 levels by 2025. Thank you very much for listening. Operator, please open the line for questions.
Operator (participant)
Thank you. The floor is now open for questions. If you have a question, please press star one one on your touchtone telephone at this or any time, then wait to hear your name announced. If at any point your question is answered and you would like to remove yourself from the queue, please press star one one again. Questions will be taken in the order they are received. We ask that when you post your question, that you pick up your headset to provide optimum sound quality. Participants can also send questions via the webcast platform. You need to click on the Ask a question button, just above the video area in the upper right-hand corner and type in your question. Please hold while we poll for questions. Our first question comes from the line of Stephen Trent with Citi. Your line is open.
Stephen Trent (Managing Director and Senior Equity Research Analyst)
Good morning, gentlemen, and thanks very much for taking my question. I had two for you. The first, if I may, when you think about the new airport in Tulum, you know, what are your high-level thoughts about, you know, servicing that airport versus also maintaining, you know, the operations that you already have in Cancun? Thank you.
Enrique Beltranena (President and CEO)
Steve, good morning. Thanks for your question. I personally met the people from Tulum last week. I think it's too early in the equation to say what we will end up doing there. From the market perspective, seems to be a good alternative, but we haven't made any decisions to move further on Tulum.
Stephen Trent (Managing Director and Senior Equity Research Analyst)
Okay, appreciate that, Enrique. Just one other quick one. Any kind of high-level view, whether it's become easier or more difficult to add domestic routes since the government opened Felipe Angeles Airport? I know for you guys, you added a bunch of routes, and I was wondering if anything's changed in the process or, you know, it's as it was before. Thank you.
Jaime Pous (CFO)
Stephen, we've been adding routes to our domestic network. We've been diversifying our presence in some of the smaller and secondary cities. We announced the opening of 40 new domestic routes in the quarter.
Holger Blankenstein (EVP of Airline)
... that is, the highest number of routes we've opened in one quarter in the history of the company. We continue in the same path as we've said, focusing very much on our core market and identifying opportunities for bus switching.
Helane Becker (Managing Director and Senior Research Analyst)
I would only add, Steve, that.
Enrique Beltranena (President and CEO)
I would only add, Steve, that there's no change in terms of how we will approve routes to be flown in the future.
Stephen Trent (Managing Director and Senior Equity Research Analyst)
Okay, that's perfect. Very helpful. Thanks, gents.
Operator (participant)
Thank you. Please stand by for our next question. Our next question comes from the line of Duane Pfennigwerth with Evercore. Your line is open.
Duane Pfennigwerth (Senior Managing Director and Fundamental Research Analyst)
Hey, guys, good morning. Just on CAT 1, specifically, what should investors be watching to gain comfort that it's going to happen, and the timing on when it will happen?
Enrique Beltranena (President and CEO)
Thank you very much, Duane. I appreciate your question. Let me tell you, I mean, Volaris is ready and prepared, we'll move forward in accordance with the Mexican U.S. authorities time. We'll focus on our core markets and our core VFR customers, we are still sticking to the possible date, which is sometime during the fourth quarter.
Duane Pfennigwerth (Senior Managing Director and Fundamental Research Analyst)
I guess just to follow up there, Enrique, from a U.S. investor's perspective, what should they be watching vis-à-vis the process to gain comfort that timing is on track?
Enrique Beltranena (President and CEO)
Look, I think the first thing they need to see is that the U.S. recognizes that there's been a big progress at the AFAC, the authority in Mexico, and that things have progressed tremendously. The second thing, which is really important, is approval of the laws, which were already approved and are well in process. The third topic is they need to pay attention to the U.S. bureaucracy process, which has its times and its process. I think you guys will be gaining confidence once they come out and they finish that process at the FAA and start requesting the DOT to erase the category.
Duane Pfennigwerth (Senior Managing Director and Fundamental Research Analyst)
Appreciate that thoughtful response and understand it's not an easy, not an easy question. Secondly, just with respect to the comment about positive TRASM in the second half, you know, could you put a finer point on that? Do you, do you expect it to be both in the third quarter and in the fourth quarter, or is it more fourth quarter weighted? Just related to my first question, is there a dependency on getting CAT 1 to bring that to fruition?
Holger Blankenstein (EVP of Airline)
Duane, certainly, we see a seasonally better second half of the year, traditionally in, at Volaris. Certainly, we will see some uplift in TRASM versus the first half of the year. In addition to that, we do see a return of CAT 1 towards the end of the third, beginning of the fourth quarter, as Enrique just mentioned. We have a plan in place to reshuffle capacity, take some pressure off the domestic market, and reallocate that to the international markets. That includes 3 aircraft to Central America, which should also help lift TRASM. We have certain actions in place and plans in place to improve TRASM for the second half of the year.
Duane Pfennigwerth (Senior Managing Director and Fundamental Research Analyst)
Okay, maybe I misunderstood. Did you say you expect year-over-year improvement in TRASM in the second half, or just that you expect a better second half versus the first half?
Holger Blankenstein (EVP of Airline)
Both statements are true. That's what we-.
Duane Pfennigwerth (Senior Managing Director and Fundamental Research Analyst)
Thank you very much. Thank you, guys.
Operator (participant)
Thank you. Please stand by for our next question. Our next question comes from the line of Helane Becker with TD Cowen. Your line is open.
Helane Becker (Managing Director and Senior Research Analyst)
Thanks very much, operator. Hi, team. Just a couple of questions on the new routes. I think you said a couple of times that there were 40 or something new domestic routes, and about 33 of those have no competition. Just kind of curious about the size of the market on a daily basis and what the load factors on those new routes look like, and is there opportunity to improve the load factor?
Holger Blankenstein (EVP of Airline)
Helane, yes, these 40 new domestic routes are in mostly secondary cities in the domestic market. We have a combination of target markets there. They're all focused on generating and stimulating demand. We have some leisure routes in there from secondary cities, but we also have a lot of VFR markets in there. Big focus city is Bajio, Guanajuato, Mexicali, Culiacán. These are secondary cities that previously didn't have direct service to other cities in Mexico. As traditionally is the case, new routes have ramp-up periods in the domestic market, typically somewhere between 6 and 9 months.
Early indications are that the routes are performing as expected, and we are stimulating the demand in these new routes with very attractive pricing and are building load factors as expected.
Helane Becker (Managing Director and Senior Research Analyst)
I think that's helpful. As, okay, shifting just shifting gears a little bit on the capacity plans. I think there was a plan to return the A319s, right? Are there still A319s, or are they gone? As you think, on these routes, as you think about the right aircraft in the market, I mean, I would think as secondary cities, they would lend themselves to a smaller aircraft rather than a larger aircraft. I don't know, what's the size of your smallest aircraft now? Will it be a drag on load factors?
Holger Blankenstein (EVP of Airline)
In terms of fleet and lane, we already returned two A319s this year, and we have still the fleet three airplanes, which are gonna leave next year. Having said that, I will pass it over to Holger for the use of the planes.
Enrique Beltranena (President and CEO)
In the domestic market, we have a mix of A321s and A320s, and we have shifted capacity of the A320 to longer stage length routes, and that has helped lift our productivity in the fleet and has contributed to our ASM capacity growth in the first quarter, the first half of the year. For new routes, what we typically do is, we start with very few frequencies per week. These new routes have about two to three weekly frequencies, and we employ the A320 or A321. As we stimulate demand in these new markets, we add weekly frequencies instead of up gauging the aircraft.
Helane Becker (Managing Director and Senior Research Analyst)
Okay.
Holger Blankenstein (EVP of Airline)
Helene,
Enrique Beltranena (President and CEO)
I have the feeling that you have a problem with our load factors, I want to make that really clear, okay? I think we did have a little bit of overcapacity during the quarter. It took us a little bit of correct that, moved some itineraries, created these new routes, moved the capacity to Central America, and we ended up basically solving the problem. To me, what is very important to leave very clear in your mind, is that there's not a demand problem. I mean, we are an ultra-low-cost carrier, so what we do is we basically reduce our pricing, we increase our ancillaries in the same proportion, and that worked perfectly. There's not an underlying demand reduction behind what you are asking, and I want to leave it very clear.
It's not a matter of sizing of aircraft. For us, the aircraft size is really important because of the cost. Let's be absolutely clear. We do have the right aircraft, the right capacity, and the right loads going forward.
Helane Becker (Managing Director and Senior Research Analyst)
Thanks, Enrique. It's not a load factor problem I have, it's more a capacity problem I have. You know, just getting over your skis. Like, I guess the way I would say it is, going into markets that are secondary or tertiary with large aircraft may not have the desired effect longer term. That's fine. You explained it very well, and I appreciate it. Thank you very much.
Enrique Beltranena (President and CEO)
Thank you, Helane.
Operator (participant)
Thank you. Please stand by for our next question. Our next question comes from the line of Michael Linenberg with Deutsche Bank. Your line is open.
Michael Linenberg (Managing Director and Senior Airline Analyst)
Oh, yeah. Hey, good morning, everyone. I guess, Enrique, back to your point about allocating, I guess, 5% more capacity to international markets. It does look like international's doing a bit better. If we think about the first half of the year, how much more profitable were international than domestic? Presumably, I think your domestic is probably just back of the envelope, is losing money. As we think going forward, is there a bit of a secular change here, where maybe the international markets are gonna generate better margins for you going forward? Maybe because some of these markets that you're in, you're the only carrier in the market, maybe it's better growth potential, and maybe we're seeing a maturation of the domestic market.
I know there's a lot of questions in there, but I'm trying to square, why your international are doing so much better than your domestic. Will just capacity, will that solve that? Thank you.
Holger Blankenstein (EVP of Airline)
A couple of comments here, Michael Linenberg, regarding domestic and international. Overall, currently, as Enrique Beltranena mentioned, we do see a temporary slight excess of capacity in the domestic market, driven by the fact that our competitors have a very few places other than domestic market to allocate new capacity coming into their fleets. As a reminder, we do have two Central American AOCs to be able to mitigate some of the excess capacity in the domestic market for us. Now, if we look at the split between international and domestic, we are allocating more capacity, and we have plans to allocate more capacity once Category 1 comes back.
If we look at our cost structure against some of our international competitors' cost structure, that cost gap has widened over the-.
Michael Linenberg (Managing Director and Senior Airline Analyst)
Mm-hmm.
Holger Blankenstein (EVP of Airline)
-last two years, and that gives us a sustainable competitive advantage going forward, especially in the transborder market, to the U.S. Yes, we are looking at higher international growth going forward once Category 1 comes back.
Michael Linenberg (Managing Director and Senior Airline Analyst)
Okay. Then, just one quick follow-up for Jaime. I was gonna ask the question about, you know, big picture, is a stronger peso better for you? You actually broke out the differences, the impact that it had on CASM and the impact that it had on RASM. I missed it, but it looked like the way the math was, it is a stronger peso is much better for you. Can you give us the impact on the two components? Thank you.
Jaime Pous (CFO)
Sure, Michael. Starting with CASM, total CASM, the impact of the better effects for the quarter was $0.19, and for the CASM, the fuel, it was $0.16. In the TRASM, the effect is twice the benefit that the impact, the cost. The number on the TRASM was $0.78, the benefit during the quarter due to the strong peso.
Michael Linenberg (Managing Director and Senior Airline Analyst)
Okay. What I think about-
Jaime Pous (CFO)
In general.
Michael Linenberg (Managing Director and Senior Airline Analyst)
Oh, go ahead.
Jaime Pous (CFO)
Go ahead.
Michael Linenberg (Managing Director and Senior Airline Analyst)
Sorry. Oh, I was just.
Jaime Pous (CFO)
I was gonna say that for every 5% depreciation of the Mexican currency, EBITDAR margin improves approximately in 0.9 percentage points, and EBIT margin 1.4 percentage points improvement. Sorry, I have a flu, and my throat is sore.
Michael Linenberg (Managing Director and Senior Airline Analyst)
That's every 5% movement in the currency, I guess, appreciation?
Jaime Pous (CFO)
That's correct.
Michael Linenberg (Managing Director and Senior Airline Analyst)
Just to go back on the CASM-ex, why did that move up a bit more than? It would seem like the strong peso had some effect, but it did, it seemed like there was a bigger impact there. Is that maybe because of some of the grounded A- 8 Airbuses because of the GTF? Is there an issue there?
Jaime Pous (CFO)
The, partially, yes. The traditional, remember, in the Investor Day, we mentioned because you are comparing versus 2022, the additional cost based on the redeliveries and fleet substitution-
Michael Linenberg (Managing Director and Senior Airline Analyst)
Ah.
Jaime Pous (CFO)
which that accounted, together with the fleet-related cost of $0.41.
Michael Linenberg (Managing Director and Senior Airline Analyst)
Okay.
Jaime Pous (CFO)
This is still aligned with the expectations that we have. Nothing to worry about.
Michael Linenberg (Managing Director and Senior Airline Analyst)
Okay, very good. You answered all my questions. Thanks, everybody. Appreciate it.
Operator (participant)
Thank you. Please stand by for our next question. Our next question comes from the line of Rogerio Araujo with Bank of America. Your line is open.
Rogerio Araujo (Senior Equity Research Analyst in U.S. Banks and Airlines)
Hey. Hi, guys. Thanks for the opportunity. I have a couple here. First one, on redelivery costs, it seems there was a $40 million expense this quarter. How can we read this in relation to expectations for upcoming quarters? I understand there that Volaris is currently having higher redelivery costs than what we would call a normalized scenario. Until when should it go, and what can we think about a normalization scenario in terms of redelivery costs once it normalizes? That's the first one. The second, if I may, is on ancillary revenue. You mentioned there is some projects that we are excited about for the second half of the year. Can you please give us a little bit more detail on them?
I know you have touched some, but what are you most excited about? Thank you.
Jaime Pous (CFO)
Hi, Rogerio. As mentioned, basically the redeliveries, it's an impact that we are going to be seeing in 2023, 2024. It start going down in 2025 and coming back to 2019 levels in 2020, by the end of 2026, beginning of 2027. It's a temporary bump based on the fleet substitution. We explain a lot during the Investor Day in December. That's basically the main reasons why the jump in those two lines noticed in this quarter, which should continue the rest of the year.
Holger Blankenstein (EVP of Airline)
Regarding ancillary revenues, we have a couple of things that we are working on and we are maturing. Number one, clearly, the uptake in our V.Club membership program has been exceeding our expectations and now contributes a significant amount of our sales. As we build that out, we're going to see improvements. Number two.
Enrique Beltranena (President and CEO)
... products around insurance and helping the customer ensure for their entire trip, we're working on that. As we already mentioned, we just launched our Infinity program with the retail partner, OXXO, that's in early stages of development, and we should see more material contribution to ancillary revenues towards the end of the year and in 2024. Overall, we have mentioned in the past that our vision is to achieve 50% of total operating revenues through ancillary revenues. We are probably going to achieve that early than anticipated. This is just a milestone, one milestone in our journey to offer more competitive base fares with optional value-added offerings on top.
Certainly, the 50% mark is not the end of the line.
Rogerio Araujo (Senior Equity Research Analyst in U.S. Banks and Airlines)
Okay, very, very clear. If I may, one follow-up from the first question. What was the 2019 levels for re-deliveries?
Enrique Beltranena (President and CEO)
$0.20, US dollar cents.
Rogerio Araujo (Senior Equity Research Analyst in U.S. Banks and Airlines)
Okay. 20.
Enrique Beltranena (President and CEO)
$0.20.
Rogerio Araujo (Senior Equity Research Analyst in U.S. Banks and Airlines)
Okay. Perfect. Thank you very much. Have a great one.
Operator (participant)
Thank you. Please stand by for our next question. Our next question comes from the line of Bruno Amorim with Goldman Sachs. Your line is open.
Bruno Amorim (Equity Research Analyst)
Yes, good morning, everybody. Thank you for the opportunity to ask a question. I just wanted to have your help to better understand the changes to the guidance with fuel costs, or the fuel prices have fallen significantly year to date. You know, the environment now from a cost perspective is much better than before, and even so you are not increasing your margin guidance for the year, which might suggest some weakness on the pricing side vis-a-vis what you were expecting earlier in the year. Of course, Category 1 might play a part here, but, you know, correct me if I'm wrong, but you were not expecting a major contribution from Category 1 this year, right? Maybe you are now accounting on only a slight delay vis-a-vis the initial plan. What's happening there?
You know, is demand weaker? Is competition fiercer? You know, any color there would be helpful. Thank you so much.
Enrique Beltranena (President and CEO)
In general, there's a lot of things happening in the revenue equation, which I think are important. The first one is, we do have to balance capacity for the third quarter, end of third quarter and fourth quarter, based on what is going to happen both with engines. B, there's two aircraft that are being delayed by Airbus that will not be arriving towards the end of the year. C, there's obviously, because of the economies in the U.S. and Mexico, some reduction of pricing. In general, we are trying to balance the new capacity versus the old capacity. The introduction of new routes in the U.S. because of Category 1 has also a ramp-up, okay?
In general, those are the most important factors, but too many things happening in the equation. Having said that, I think sticking to our EBITDAR margin guidance is something really good, and it takes us back to a level from 29%-32%, which is really good. 31%.
Bruno Amorim (Equity Research Analyst)
Thank you.
Operator (participant)
Thank you. Please stand by for our next question. Our next question comes from the line of Alberto Valerio with UBS. Your line is open.
Alberto Valerio (Executive Director and Equity Research Analyst in U.S. and Latin America Airlines)
Hey, good morning. Thanks for taking my question, and good morning, Renato. One quick one from my side. We heard today in the morning that Pratt & Whitney will be recalling 200 engines for extra maintenance. I would like to know if Volaris has one of these aircraft with those engines or any of Volaris competitors in Mexico? Thank you.
Enrique Beltranena (President and CEO)
That's correct. We heard right on in their conference this morning that they have determined the rare condition in power metal used to manufacture certain engine parts, which will require accelerated fleet inspection. They are calculating about 200 engines that need to be inspected by mid-September of this year. It's going to be a program, a progressive program, which is calculated to be in the following six months. Thanks God, the company planned to retain six of the aircrafts that were supposed to leave this year. We extended those six aircraft. That decision will allow us to better handle any operational challenges related to engine availability and aircraft delivery delays during the last two quarters, okay?
Too early to calculate, what's the real impact and where it's going to be the impact, but, I think the company has the provisions and has been working on an accelerated way to try to control the impact.
Alberto Valerio (Executive Director and Equity Research Analyst in U.S. and Latin America Airlines)
Okay. Thank you.
Operator (participant)
Thank you. I'm showing no further questions. This concludes today's question and answer session. I would now like to invite Mr. Beltranena to proceed with his remarks. Please go ahead, sir.
Enrique Beltranena (President and CEO)
Thank you very much, operators. as always, I want to thank our family of ambassadors, the board of directors, the investors, the bankers, the lessors, suppliers, for their commitment and support during another quarter. I look forward to addressing you all again in October, and, hopefully, I can see some of you in September when we celebrate 10 years of being public. Thank you very much to everybody. It was a great pleasure to be with you this morning.
Operator (participant)
Ladies and gentlemen, this concludes the Volaris conference call for today. Thank you very much for your participation, and have a nice day.