Volaris - Earnings Call - Q2 2025

Transcript

Operator (participant)

Good morning, everyone. Thank you for standing by. Welcome to Volaris' second quarter 2025 financial results conference call. Our lines are in listen-only mode. Following the company's presentation, we will open the call for your questions. Please note that we are recording this event. This event is also being broadcast live via webcast and can be accessed through the Volaris website. At this point, I would like to turn the call over to Ricardo Martínez, Investor Relations Director. Please go ahead, Ricardo.

Ricardo Martínez (Director of Investor Relations)

Good morning, and thank you for joining the call. With us is our President and CEO, Enrique Beltranena, our Airline Executive Vice President, Holger Blankenstein, and our Chief Financial Officer, Jaime Esteban Pous Fernández. They will be discussing the company's second quarter 2025 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 results to differ materially from expectations, as described in the company filings with the United States SEC and Mexico CNBV. These statements speak only as of the day they are made, and Volaris undertakes no obligation to update or modify any forward-looking statements. As in our earnings pre-release, our numbers are in US dollars compared to the second quarter of 2024, unless otherwise noted. With that, I will turn the call over to Enrique.

Enrique Beltranena (President and CEO)

Good morning, everyone, and thank you for joining us. If there is one message I want to leave you with today, it's that Volaris has proven its resilience time and again, and we are well positioned to keep doing so. Yes, this is a challenging industry, and we're not immune to external headwinds, but we stay focused on what we can control, we adapt quickly, and execute with discipline. We believe there is a significant opportunity ahead and remain confident in our ability to deliver value for shareholders. We delivered second quarter results slightly ahead of our guidance, achieving a 28% EBITDA margin, which we expect will again rank near the top of the North American airline industry. Throughout the quarter, we took advantage of our flexible business model and took decisive actions to capitalize on demand across our network.

Coupled with tactical capacity adjustments through the quarter, we delivered TRASM as most seen at $0.078 ahead of our forecasted range, and ancillary revenue per passenger reached $54, remaining resilient with limited price elasticity and serving as a key contributor to total revenue. To reiterate, we stay focused on what we can control, particularly maintaining cost efficiency. CASM ex-fuel remained contained at $0.0569 despite lower capacity growth than initially planned. The quarter started on a softer demand note, so we prioritized sustaining load factors through demand stimulation. However, as we saw signs of demand sequentially improving by mid-quarter, we shifted gears to maximize margin performance. In the domestic market, as some initial fears around tariffs and its economic pressures eased, we turned our focus to yields and strategically capturing higher fares where possible. While hesitancy to travel remained on U.S.

routes, we took advantage of fare elasticity among travelers willing to book close to departure. While international load factors moderated as we prioritized yield expansion, domestic load factors recovered to 88% by quarter end. This drove a total second quarter load factor of 82%. Recent demand trends have been constructive, and we see potential for cross-border traffic to recover once volatility eases. Let me provide additional context. During the quarter, Volaris conducted sentiment surveys among passengers on both sides of the border. We found that a significant portion of travelers had mainly paused their travel plans due to fears of deteriorating economic conditions, possibly linked to immigration rhetoric. In response, we implemented several initiatives, including increased flexibility, the option to defer airport fee payments until check-in, among others.

It is worth noting that 75% of respondents ultimately intended to fly again within the next six months, suggesting that underlying demand remains positive into the future. Looking ahead, we want to reiterate that our capacity decisions will continue to be anchored in two guiding priorities: customer demand and sustained profitability. While U.S. immigration uncertainties may continue to influence demand in the near term, we see this as a manageable medium-term factor. Despite this, and ongoing industry-wide OEMs' constraints and macroeconomic conditions, we continue growing aligned with market trends. Concurrently, demand for the second half of the year is shaping up to be stronger than the first half and is tracking in line with historical patterns. With improved feasibility, we are reinstating our full-year EBITDA margin guidelines, now expecting a range of 32%-33%.

This outlook is supported by fundamental drivers pointing to sequential improvement in the second half of 2025. I want to emphasize that regardless of external conditions, Volaris has consistently delivered results in line with guidance over many consecutive quarters. Looking ahead to 2026, in light of the current macroeconomic environment, we are embedding additional flexibility into our fleet plan, positioning Volaris to grow ASMs in the mid-single digits in line with emerging market dynamics. Our agile approach to managing the productive fleet enables capacity adjustments of about three percentage points in either direction, allowing us to respond to demand trends while maintaining margin discipline. I will now turn the call over to Holger to continue to discuss our second quarter commercial and operational performance. Holger, please.

Holger Blankenstein (Airline EVP)

Thank you, Enrique. Good morning, everyone. During the quarter, we took several decisive actions focused on two guiding priorities mentioned by Enrique: customer demand and sustained profitability. These included deploying capacity with agility without affecting already booked passengers, rapidly diagnosing elasticity in both domestic and international markets, which performed differently, as domestic was more responsive to lower base fares while international showed lower elasticity, and continuing to deliver excellent customer service while introducing new value options for customers and passengers and targeting new customer segments. Let's now move to our commercial results while also highlighting the aforementioned initiatives and associated outcomes. Throughout the quarter, we acted nimbly in response to early softness in April booking. As the quarter progressed, we began capturing higher fares in close-in bookings and saw continued strength in ancillary purchases. We adjusted our capacity growth to support TRASM.

We reduced ASMs each month of the quarter, resulting in 8.7% year-over-year growth or 1.7% sequential growth. Domestic load factor reached 88% while international load factor was 75%, as we prioritized yield over loads, resulting in a total load factor of 82%. TRASM declined 12% year-over-year to $0.078 versus the 17% reduction we observed in the first quarter. Ancillaries continue to be a significant bright spot in our business. These products have proven highly resilient in all conditions, with our average ancillary revenue per passenger remaining virtually unchanged across markets. Our average ancillary revenue per passenger for the quarter was $54, continuing a strong trend above the $50 threshold and consistently accounting for over 50% of total operating revenues. Purchases from members of the V Club, our discount club, now drive around 16% of our total revenues.

Digging deeper, we are adapting our business model to meet the changing needs of the market. This includes lowering barriers to travel, serving diverse customer segments, and encouraging repeat travel. All of this has been accomplished without losing our DNA as an ultra-low-cost carrier. To lower barriers to travel, we recently decoupled the airport use fee from the ticket purchase process, allowing customers to pay the fee any time before check-in rather than at the time of booking. This enables travelers to lock in low base fares while giving them the flexibility to pay the expensive airport fees later on. We also introduced a summer campaign aimed at stimulating international demand, which remains strategic and profitable despite recent softness. This initiative gives customers greater flexibility. If their plans change, they can cancel their booking without penalties and request a refund.

In addition, we are maturing our paid ancillary product that allows passengers to cancel for any reason, providing extra peace of mind and more flexibility for their travel plan. Given the Mexican market configuration, we believe Volaris is well positioned to address more diverse, attractive passenger segments. To capitalize on this opportunity, we have expanded our customer footprint through code-share agreements, which generate additional revenues without adding cost. Frontier was our first and most natural partner, given our shared ownership and compatible systems. As a reminder, this partnership contributes around 2%-3% points to our international load factor. Building on that success, we have developed further partnerships with airlines such as Copa, Iberia, and Hainan, aligned with foreign investment in Mexico, the Mexican diaspora, and inbound tourism.

As a key step in driving repeat travel and rewarding passenger loyalty, we are pleased to announce the launch of our in-house loyalty program, Altitude. The growing strength of our recurring revenue streams is a clear validation for this move. Nearly 30% of our bookings include at least one membership product, signaling strong customer engagement. Historically, loyalty programs and international partnerships have been dominated by legacy carriers in Mexico. However, we believe there is significant opportunity for us to grow in this space without sacrificing our cost advantage. With strong presence in key markets like Mexico City, Tijuana, and Guadalajara, we are well positioned to expand this strategy further. As the largest airline by passengers in Mexico, we are excited about the value that all these initiatives bring to both our customers and to Volaris.

Our goal is to position Volaris as the airline of choice, not only for our core VFR base, but for all passenger segments traveling from our key cities across the network. We know how to introduce new ancillaries and partnerships in a low-cost, low-complexity way, and you can expect us to continue innovating our offering. Moving to our operations, in the second quarter, key metrics remain strong, with an on-time performance within 15 minutes of 80.9%, a scheduled completion rate of 99.6%, and continued strength in the overall Volaris experience, reflected in customer satisfaction and a Net Promoter Score of 34%. Looking ahead to the third quarter, the summer season load factors are in line with normal seasonality, and the revenue team is working on yielding up on close-in bookings, with customers making decisions closer into departure, and we also remain sensitive to macro and geopolitical headlines.

I want to reiterate on Enrique's priorities for Volaris: customer demand and sustained profitability. From my perspective, the capacity reductions already executed are sufficient to align with demand and support the achievement of our full-year guidance. Now, I will turn the call over to Jaime to cover our second quarter 2025 financial results and guidance.

Jaime Esteban Pous Fernández (CFO)

Thank you, Holger. Our financial performance through the second quarter evolved in line with what we had anticipated, and we worked with discipline to maintain our costs and financial position. Compared with the same period last year, our second quarter 2025 results were as follows: total operating revenues were $693 million, a 5% decrease. On the cost side, CASM was $0.0805, a reduction of 0.3%. Average economic fuel cost declined 14% to $2.46 per gallon. CASM ex-fuel was $0.0569, up 7%, aligned with our guidance as we controlled costs in spite of flying fewer than planned ASMs during this period. The main changes year-over-year with regards to the specific P&L lines were in maintenance as well as aircraft and engine variable lease expenses. The increase in the maintenance line resulted from a higher number of maintenance events and increased aircraft utilization.

Aircraft and engine variable lease expenses rose 24%, mainly due to redelivery accruals for the scheduled aircraft returns. In the other operating income line, we booked sale and lease back gains of $4.8 million related to the Airbus deliveries of two new aircraft. As a reminder, this line also includes our aircraft grounding compensation from Pratt & Whitney. EBITDA reached $194 million, with a margin of 28%, which came in above the guidance provided for the quarter. EBIT was a loss of $22 million, with a margin of -3.2%. Finally, we incurred a net loss of $63 million, translated into a loss per ADS of $0.55. Moving briefly to our P&L for the first six months of 2025 compared to the same period of 2024, total operating revenues were $1.4 billion, an 8% decrease.

CASM was $0.0797, a 1% decrease, with an average economic fuel cost of $2.54 per gallon, 13% lower. CASM ex-fuel was $0.0554, 6% higher. EBITDA totaled $397 million, a 20% decrease, with an EBITDA margin of 29%. EBIT was a loss of $32 million, representing an EBIT margin of -2.4%. Net loss was $114 million, or -$1 per ADS. Turning now to cash flow and balance sheet data, the cash flow generated by operating activities in the second quarter was $136 million. The cash outflows used in investing and financing activities were $16 million and $197 million, respectively. Second quarter CapEx, excluding fleet pre-delivery payments, totaled $25 million. Year to date, it stood at $88.5 million, in line with the $250 million we expect for the full year. Volaris ended the quarter with a total liquidity position of $788 million, representing 26% of the last twelve months' total operating revenues.

We are maintaining a disciplined and conservative approach to cash management, with a target of keeping liquidity above 20% of the last twelve months' revenues. The same discipline and conservativeness applies to our debt management. Our net debt-to-EBITDA ratio stood at 2.9x, slightly above the 2.7x in the first quarter of 2025 and unchanged from the same period last year. While we expect a sequential increase in the third quarter, this is anticipated to mark the peak of leverage, with gradual improvement projected through the end of the year. Moreover, all of our pre-delivery payments for aircraft scheduled for deliveries through mid-2028 are already financed. Our strong balance sheet with no material near-term debt maturities, excellent liquidity position, and discipline in controlling costs give us confidence that Volaris is well positioned to navigate the current environment.

Now, turning to engine availability and our fleet plan, as of June 30, our fleet consisted of 149 aircraft with an average age of 6.5 years, with 63% of the fleet being fuel-efficient new models. During the second quarter, we had an average of 36 engine-related aircraft grounding. Turning now to guidance, we are seizing the opportunity to focus on what we can control and reduce the range of potential outcomes for the year by adjusting capacity to prioritize profitability. With that improved visibility, we have reinstated our full-year EBITDA margin guidance and expecting sequential improvement in the second half of 2025. As a result, our updated full-year 2025 guidance is as follows: ASM growth of around 7% year-over-year compared with our prior expectation of 8%-9%, EBITDA margin in the range of 32%-33%, and CapEx, net of financed fleet pre-delivery payments of approximately $250 million.

This outlook assumes an average foreign exchange rate of around 19.65 Mexican pesos per U.S. dollar. We also assume an average U.S. Gulf Coast jet fuel price of approximately $2.10 per gallon. Moving on to our third quarter of 2025 guidance, we are expecting ASM increase of approximately 6% year-over-year, TRASM of around $0.086, CASM ex-fuel of approximately $0.055, and an EBITDA margin in the range of 32%-%. This quarterly outlook assumes an average foreign exchange rate of around 19 Mexican pesos per U.S. dollar and an average U.S. Gulf Coast jet fuel price of approximately $2.20 per gallon during the quarter. Now, I will turn the call back over to Enrique for closing remarks.

Enrique Beltranena (President and CEO)

Thank you, Jaime. Volaris is a one-of-a-kind best-in-class airline in North America. We are truly a world benchmark in unit cost and have a strong balance sheet to help us weather the volatility.

We are attractive to lessors and lenders, with low leverage and no near-term maturities. Our longstanding leadership team brings exceptional industry expertise and stability, which continues to be a key differentiator for Volaris, and I feel very proud of them. Volaris serves a growing customer base in an emerging economic region, where we have played a leading role in democratizing air travel over the past two decades. In Mexico, 73% of the domestic market is served by ultra-low-cost carriers, underscoring the strength and viability of this model in emerging economies. Nearly 40% of our routes are uniquely served by Volaris, enabling us to continue converting bus passengers to air travel through our highly competitive pricing. Increasingly, our goal is to further capitalize on our market leadership by expanding high-value offerings and diversifying our passenger segments.

When combined with our strong operational performance, this makes for a resilient, differentiated business model with an enhanced margin mix distinct from the U.S. landscape in many, many meaningful ways. Thank you very much for listening. Operator, please open this line for questions.

Operator (participant)

Thank you. The floor is now open for questions. If you have a question, please dial star one one on your phone at this time or any time. If at any point your question is answered, you may remove yourself from the queue by pressing star one one again. Questions will be taken in the order they are received. Those following the presentation via the webcast may post their questions on the platform. Please hold while we poll for questions. Our first question comes from the line of Thomas Fitzgerald with TD Cowen. Your line is now open.

Thomas Fitzgerald (VP of Equity Research)

Hi. Congrats on the nice results, and thanks so much for the time. I'm just wondering if you could maybe unpack just kind of how you're thinking about pricing scenarios for and like RASM scenarios for the second half of the year a little bit more.

Holger Blankenstein (Airline EVP)

Good morning, Tom. This is Holger. In the first half, we did see some softness in line with the broader industry trends. I would say starting mid-quarter of the second quarter, we see sequential improvements with the stabilization of demand and fare trends ahead of the peak summer season. The demand trends have been quite constructive, and we're also seeing stronger potential for cross-border traffic as volatility eases. We do expect that postponed VFR travel over the summer season will resume, and that leads us to see second-half demand tracking stronger and in line with historical seasonality. That is both true for volume and for fares. We see better TRASM outcomes for the second half of the year.

Thomas Fitzgerald (VP of Equity Research)

Okay, great. That's really helpful. Just as a follow-up, could you help us on the in-house loyalty program, Altitude? Could you help us think about the timeline to ramp that up? How are you thinking about that in a non-ticket revenue per passenger? How should outside investors be forecasting that potential business? Thanks again for the time.

Holger Blankenstein (Airline EVP)

Altitude is really designed to reward repeat travel and drive loyalty for an expanding customer base outside of the VFR core traveler. It is expected to increase total revenue per passenger by driving purchasing frequency and customer retention. We've seen quite a positive impact. Customer reactions in the first couple of days of this program have been extremely positive. However, for this financial year, 2025, we do not see any material financial impact. We are focusing on scaling the program and the enrollment in the program. We should see more meaningful impact of this program in subsequent years.

Operator (participant)

Thank you. Our next question comes from the line of Michael Lindenberg with Deutsche Bank. Your line is now open.

Shannon Doherty (Equity Research Analyst)

Hi, this is Shannon Doherty on for Mike. Thank you for taking my question. I'm just curious about how demand trends in other markets besides the U.S. have trended, you know, heading into this strong summer travel period, particularly on the international front, Central America and into South America. Thank you.

Holger Blankenstein (Airline EVP)

Hi. This is Holger again. We're seeing, as I mentioned, a recovery in the transporter market, and we're also seeing the same trends in the domestic market. I can tell you that customers are deciding more close-in to book their travel for the summer. Customers do remain sensitive to macro and geopolitical headlines. This close-in booking has enabled us to yield up both in the domestic and international markets while not affecting load factors. Overall, we're quite excited about the third quarter and the fourth quarter.

Shannon Doherty (Equity Research Analyst)

Great, thanks. Just a quick follow-up. Jaime, I think that you gave us the number of grounded aircraft in the second quarter and impacted engines from GTF. Can you just repeat that and what your expectation is for the full year?

Jaime Esteban Pous Fernández (CFO)

Yes, Shannon. On the second quarter, we had 36 aircraft grounded. That number should be the same for the rest of the year. It's going to be between 35 and 36. It's important to mention, everyone should be thinking about ASM growth. We have been controlling the situation and managing the situation over the past 24. It's like the new normal, and we are well prepared to continue operating like that. We see improvement going forward, and the situation should be improving gradually.

Shannon Doherty (Equity Research Analyst)

Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Duane Pfennigwerth with Evercore ISI. Your line is now open.

Duane Pfennigwerth (Senior Managing Director of Equity Research)

Hey, guys. Good morning. Can you speak to transborder stability specifically and maybe just play back the history for us? When did you first see the pause or the pullback? Could you play back kind of trends through the balance of the second quarter to today?

Holger Blankenstein (Airline EVP)

Hi, Duane. This is Holger again. Yes, as I mentioned, mid-quarter of the second quarter, we did see improvements of demand patterns and fare environment in the transporter market and a stabilization of demand ahead of the peak season in the summer. We believe we are convinced that VFR travel is resuming. People want to see their friends and family over the summer vacation period, and that the retraction of demand that we saw earlier on in the year was temporary and that structural demand in the transporter market remains solid.

Duane Pfennigwerth (Senior Managing Director of Equity Research)

Is that just to put a finer point to that, is that Mexico outbound, Mexico inbound? Is it fairly balanced? Are you seeing that stabilization across both?

Holger Blankenstein (Airline EVP)

Duane, it's quite balanced, both point of sale in the U.S. and point of sale in the Mexican markets going towards the U.S.

Duane Pfennigwerth (Senior Managing Director of Equity Research)

Okay. With the revision in capacity for the full year and for the back half, can you talk about the relative revision for international capacity growth versus domestic capacity growth?

Holger Blankenstein (Airline EVP)

Yeah, sure, Duane. We've slightly lowered our ASM growth plans for the full year from 8% to 9% originally to now 7% ASM growth for the full year. That really reflects both engine availability and our commitment to profitable growth. If you break that down by geography, we're currently guiding to a 6% ASM growth for the third quarter, which is a lower growth in the domestic, around 4%-5%, and international in the mid-teens for the third quarter. That's the breakdown.

Duane Pfennigwerth (Senior Managing Director of Equity Research)

Okay, thank you.

Holger Blankenstein (Airline EVP)

Thanks.

Operator (participant)

Our next question comes from the line of Steve Trent with Citi. Your line is now open.

Steve Trent (Managing Director)

Yes. Good morning, gentlemen, and thanks very much for taking my question. Can you hear me okay, by the way?

Jaime Esteban Pous Fernández (CFO)

Yes, we can, Steve.

Steve Trent (Managing Director)

Oh, great. Thank you. Sorry, I was having some trouble with my phone. Just curious, thank you very much for the color on next year's capacity growth. When we think about the World Cup event coming up, do you think that this is something that potentially could significantly move the needle for you guys, or is it just sort of too short a period to really make a big difference in RASM, for example? Thank you.

Holger Blankenstein (Airline EVP)

Steven, this is Holger again. Let me tell you a little bit about the World Cup. We do have excellent connectivity with the host cities. Volaris operates in 10 of the 16 official host cities, and that covers more or less 62% of total matches. If you include the Frontier code share that enables us to diversify our network together with Frontier, we reach 13 of the 16 host cities. We do see this as a tailwind for next year for the summer season. We will monitor and adjust capacity accordingly for that approximately two-month period. We might explore external lifts if we need external lifts for that two-month period.

Steve Trent (Managing Director)

Great color, Holger. Appreciate that. Just a quick follow-up. I know some of this political stuff is impossible to predict, but with everything going on today, this sort of dispute between U.S. DOT and Mexico, possibly our competitors are going to have a joint business agreement canceled. When you think about all of the stuff in the mix, is it conceivable that all else equal, that cancellation helps Volaris? Has it really made any difference in terms of how you guys operate your northbound flow, or is it really not? Does it make a difference at this juncture? Thank you.

Enrique Beltranena (President and CEO)

Steve, this is Enrique Beltranena. Let me tell you, we met with the Mexican government yesterday, and I remain confident that both governments will reach a logical and mutually beneficial agreement. To be honest with you, when you take a look through the points that are under discussion, most of them are kind of a delayed agenda that, given the changes in both governments, we couldn't tackle at the end of the previous government. We will continue to provide updates as appropriate. We have to be, I mean, being consistent with our approach in situations like this. I don't think we should speculate. It's not related to a category two downgrade. In practical terms, the order simply requires us to submit our schedules to the U.S. authority. In line with the way our government has managed its relationship with the U.S., we'll feel tremendously confident that the solution is going to be here in the next days.

Steve Trent (Managing Director)

Okay. Super helpful. Thank you, Enrique.

Operator (participant)

Our next question comes from the line of Rogerio Araujo with Bank of America. Your line is now open.

Rogerio Araujo (Director)

Hi, gentlemen. Good morning. Congratulations on the results. A couple here. One is on ASM growth for 2026 and 2027. Any preliminary expectation you could share, assuming the ungrounding of aircraft and the upcoming deliveries? Maybe a range we could rely on. Also, with the current TRAS level, how much margin would you expect Volaris to deliver if not for the grounding of part of the fleet? In your view, would the net margin be on positive territory if we would consider a theoretical normalized operation? Thank you.

Holger Blankenstein (Airline EVP)

I meant for the next year. What I do want to highlight is that flexibility for us remains a strategic advantage, especially as we look at the evolving macro and competitive landscapes. What we are currently targeting very preliminarily is an ASM growth in the mid-single digit. This strategic flexibility that I mentioned enables us to adjust capacity up or down around about 3% in either direction. It helps us to respond very quickly to shifting demand trends, both upward and downwards. What we do want to maintain and we want to emphasize next year is margin discipline, despite all the macroeconomic uncertainty. We want to reiterate that we are well positioned to grow in an emerging market.

Jaime Esteban Pous Fernández (CFO)

Rogerio, this is Jaime. With respect to your second question regarding margins on a normalized situation without AOEs due to the engines, considering that we are targeting having a mid-37% margin, in a normal scenario with a normal productive versus non-productive fleet, EBIT should be 2.5 points better. EBITDA right now has a benefit of around 4 points, and the net margin will be 3 percentage points higher than current conversion due to the grounding.

Rogerio Araujo (Director)

Okay. That's very helpful. Thank you. I actually got the line cut. My team as well at the beginning, so maybe there was some kind of problem with your line. If you could please repeat a range for ASM growth for 2026 and 2027, if you had that so far.

Holger Blankenstein (Airline EVP)

Yeah. I mentioned, Rogerio, that our capacity growth for next year, we're targeting ASM growth in the mid-single digit with a flexibility of ±3% to respond to shifting demand patterns.

Rogerio Araujo (Director)

Okay. Very clear. Thank you so much.

Holger Blankenstein (Airline EVP)

For 2026 and 2027, it's too early to say right now.

Rogerio Araujo (Director)

Okay, thank you.

Operator (participant)

Our next question comes from the line of Pablo Monsivais with Barclays. Your line is now open.

Pablo Monsivais (Equity Research Analyst)

Hi. Thanks for taking my question. Just a little bit of a follow-up on the demand side. Besides immigration impact, have you seen any impact on the soft economic activity that we're seeing in Mexico, particularly in the domestic market? Also, if you can share some pricing dynamics within the domestic market. For example, I would love to know if you're seeing some price sensitivity on the leisure market relative to VFR on the domestic side. Just some more color will be welcome. Thank you.

Jaime Esteban Pous Fernández (CFO)

Could you repeat the initial question so that we can follow up? Thank you.

Pablo Monsivais (Equity Research Analyst)

Yes. On the impact on demand of Mexico's soft economic activity.

Enrique Beltranena (President and CEO)

If I may, Pablo, I think we, as mentioned in our remarks, there are some macro signals to watch. There are some other macro signals that we need to watch too. Okay? Let me give you three examples which are very important. I mean, foreign direct investment remains strong. It reached $21 billion in the first quarter, which is 9% higher than the previous year in the same quarter. This reflects the sustained long-term confidence. A second example is retail sales in Mexico, which fell -2% year-over-year in May. In the U.S., posted a +4% year-over-year in June. This highlights strong demand across our markets. Remittances are recovering with June estimates of 13% year-over-year, reinforcing household consumption after a temporary dip in May. I will pass it over to Holger so he explains the dynamics on domestic and international markets broken down by segment.

Holger Blankenstein (Airline EVP)

Yeah. This is Holger. There are two main trends in the domestic markets when we look at bookings. Number one, we do observe quite significant base fare elasticity for far-out bookings, giving us the ability to stimulate demand further out. For closer-in bookings, customers are deciding very much last minute to buy their summer vacations for the high season, July and August. We're seeing quite robust close-in bookings. Those would be the two trends in the domestic market, coupled with strong ancillary sales. We're now seeing ancillary products being in the range of 60% of total operating revenues, and ancillary products and sales have been quite resilient to any demand shocks.

Enrique Beltranena (President and CEO)

Finally, Rogelio, this is Enrique again. I think it is important to say that in these kinds of times, it's not only the economy what drives the performance of a company. I strongly think and feel very positive of the way Volaris is doing things, leaving the capacity basically that is installed in the market, leading in pricing, leading in choices for our customers, leading in the way we perform from the operational perspective. I think that's what's making the tremendous improvement in our numbers and why we feel very, very bullish or bullish for the future.

Pablo Monsivais (Equity Research Analyst)

Thank you very much.

Operator (participant)

Thank you. Our next question comes from the line of Guilherme Mendes with JPMorgan. Your line is now open.

Guilherme Mendes (Senior Equity Research Analyst)

Hey, good morning, guys. Thanks for taking my question. First, one is a follow-up on the booking curve. I guess it's clear that passengers are buying tickets closer to the actual flight date. Holger, when you compare to the first quarter, are we already starting to see an improvement on the booking curve, on the actual visibility on the booking curve, or not necessarily? The second point is on the overall competitive environment, if you mind sharing your views on how competition is behaving and the overall industry rationality. Thank you so much.

Holger Blankenstein (Airline EVP)

Okay. Yes, we do see an improvement versus the first half of the year, especially the first quarter. Starting in mid-second quarter, we see a stabilization of demand patterns both in the international and the domestic market. Demand for the second half of the year is tracking stronger. Remember that the second half of the year is seasonality adjusted always stronger than the first half of the year. We do see a more positive outlook for the second half of the year. In terms of competition and capacity, it is encouraging to see that industry-wide capacity in both international and domestic markets is adjusting with demand. The capacity environment in the domestic market has been quite rational. I do want to highlight that Volaris was the first carrier to make significant capacity reductions, focusing on cash-positive flying and EBIT-positive flights. We see that the industry has also adjusted their capacity downwards to bring capacity growth more in line with demand patterns that we're currently seeing.

Operator (participant)

Thank you. Our next question comes from the line of Abraham Fuentes Salinas with Banco Santander, Mexico. Your line is now open.

Abraham Fuentes Salinas (Equity Research Analyst)

Yes, thank you. Hi. Good morning. Could you give us more color about your fuel hedging strategy, please?

Jaime Esteban Pous Fernández (CFO)

Of course. This is Jaime. We have some hedges for the months of July and August. We are hedging 40% of the consumption at a strike price of $2.15 per gallon.

Abraham Fuentes Salinas (Equity Research Analyst)

Okay. Perfect. Thanks.

Operator (participant)

Thank you. Our next question comes from the line of Jens Spiess with Morgan Stanley. Your line is now open.

Jens Spiess (Vice President and Equity Analyst)

Yes. Hello, everybody. Thank you for taking my question. I have three, actually, if I may. The first one is, if there are any potential capacity easing at the Mexico City Airport, what would be the implications for you? I mean, I guess, obviously, that would be positive, but in what magnitude? Secondly, just to delve deeper into the 3% point in either direction of capacity flexibility, that's for 2025, right? Basically concentrated in the second half of this year, just to be clear I understood it correctly. Lastly, taking into account your new capacity guidance, what are you assuming for the rest of the year in terms of pre-deliveries and deliveries? Thank you.

Enrique Beltranena (President and CEO)

This is Enrique Beltranena. In respect to your first question related to slot capacity at Mexico City, I think what happened during the last quarter where we were able to raise one operation more on a per-hour basis in Mexico City, I don't see any further improvements in the next year and a half. There's one possibility which will take about a year and a half to two years to be constructed, which is a faster runway for landing and being able to pull out much faster from the active road. That's going to take about a year and a half to two years. It's a well-studied proposition as of now, still not under execution. Speaking about the rest of the things, I will allow Jaime to give you the responses that you requested.

Jaime Esteban Pous Fernández (CFO)

Hi again. How are you? This is Jaime. First, on capacity and deliveries of new planes, we're going to be redelivering three aircraft during the second half of the year, and we are going to be receiving eight new aircraft in the second half. Again, remember, think about ASM growth. We already provided the guidance of the ASM growth for the second half. As Holger mentioned, in terms of the flexibility on capacity, that flexibility, the year 2025, the guidance includes what we feel comfortable in order to deliver the guidance that we provided. For 2026, that will be in the mid-single digit with the potential to go 3 or 3 percentage points below, depending on how we see capacities.

Holger Blankenstein (Airline EVP)

We were referring to 2026 Jens.

Jens Spiess (Vice President and Equity Analyst)

Oh, perfect. All right. Thank you.

Operator (participant)

Thank you. Our last question is from Alberto Valerio with UBS. Your line is now open.

Alberto Valerio (Executive Director)

Hi. Thank you for the opportunity, Enrique, Jaime, and Holger. I have two on my side. The first one about your flexibility within the Volaris network. How you guys are between domestic and international. Looks like domestic is a little more stronger than the international for this year due to the geopolitical conflict and so forth. How flexible are you guys to change the routes? My second one is about the initial remarks of Holger in the beginning of the call about the unbundling the tariffs of the airports. Have you seen any change in the behavior of the consumer in terms of the airport if they are preferring to go to one airport and avoid another one? Just a curiosity. Thank you very much, and congrats on the results.

Holger Blankenstein (Airline EVP)

Hello. This is Holger again. Regarding your first question, I think what distinguishes us from our competition is the flexibility that we have in deploying capacity. Our guiding principle is cash-positive flying and profitable flying. We will allocate capacity wherever that is the maximum in any market. It could be in the U.S. or in the domestic market, and we look at that on a route-by-route basis. Regarding the second part of your question, we recently unbundled the airport fees, which are very significant in Mexico and quite expensive and can exceed the base fare in many instances, from the actual ticket price. We give the customer the choice to pay whenever they want, either at the time of booking or any time between booking and check-in.

That really enables us to show the really, really low base fares that we have directly to the customers and enables customers to buy those low base fares well in advance. With that, we stimulate demand through low, low base fares that are actually visible on our website. We have seen a good uptake of customers that prefer to pay the airport fees after the purchase. Between 25% and 30% of our customers choose to pay the airport fees before check-in and not at the time of purchase. It has been a net positive for us and the customer.

Alberto Valerio (Executive Director)

Thank you very much.

Operator (participant)

Excuse me. This concludes today's question and answer session. I would like to invite management to proceed with its closing remarks. Please go ahead, sir.

Enrique Beltranena (President and CEO)

I'd like to close the call with a very important remark. I think that we are in an environment where economies and the geopolitical issues are affecting the business models in the aviation market. There's something I want to strengthen in a very important way. We are in control of this company. We are very positive. We are controlling capacity. We are controlling pricing. We are controlling our execution in terms of operations. That is marking a change in what we are perceiving towards the future. It is important to say that we remain positive, that we see stabilization of demand, that we have a very resilient business model, and discipline focused on what we can control. Finally, I would like to thank you very much, our family of ambassadors, our Board of Directors, our investors, our bankers, and our lessors and suppliers for their support. I look forward to speaking to you all on the third-quarter call, and thank you very much for all the support you provide to this company.

Operator (participant)

This concludes the Volaris conference call for today. Thank you very much for your participation and have a nice day.