Signum Perspectives
Controladora Vuela Compañía de Aviación, S.A.B. de C.V.
On May 13, the U.S. Federal Aviation Administration (FAA) announced that Costa Rican airports do not meeting security standards established by the International Civil Aviation Organization (ICAO), and consequently lowered the rating on its international airports to Category 2 from Category 1.
This means that either Costa Rican airports do not have the capacity to ensure that airlines meet ICAO minimum international security standards, or Costa Rican aeronautical authorities are weak in a number of areas, such as technical experience or staff training, among others. Bangladesh,
Curazao, Ghana and Thailand are also rated Category 2.
The rating (which is assigned to a country, not the airlines) was determined on the basis of the FAA International Aviation Security Evaluation program (IASA), which determines whether a country is able to adhere to international aviation security programs and practices recommended by the ICAO
and considers only two ratings: Category 1, under which countries assigned the rating are deemed capable of monitoring adherence to ICAO security standards, and Category 2. As a result of the downgrade, airlines that operate in Costa Rica will not be able to open new routes to the United States, but will not lose any of the routes currently in use either.
The downgrade could impact Volaris, as part of the company’s growth strategy consists of penetrating the U.S. market through routes from Central American airports like Costa Rica, which began operating in 2017. The controlling company sees the following advantages: an absence of very lowcost carriers, a growing middle class, and dollar-denominated revenues, which provide an exchange rate hedge.
The controlling company could offset risks associated with the downgrade, as it operates in other Central American countries like Guatemala and El Salvador with a Category 1 rating, and new routes to the U.S. could be opened from there. Furthermore, management mentioned that in Q119, its Costa Rican operations accounted for only 3.6% of total available seats per mile, which should enable it to move its new route plans to other destinations.
The Mexican Civil Aviation Authority adheres to ICAO international security standards, so Mexico has a Category 1 rating.
Volaris’s Q119 results showed strong increases in EBITDA and total revenues derived from a double digit y/y increase in passenger traffic as well as changes in the IFRS 16 new leases standard. Volaris’s EV/EBITDA multiple is currently 8.2x, far higher than the industry multiple (7.2x) based on a sample of five U.S. low cost carriers. Our target price and rating are currently under review.