Fly Into Mexico With Volaris IPO

| About: Volaris Aviation (VLRS)

Next week, investors will get their first opportunity to invest in Volaris (NYSE:VLRS). Volaris is an ultra-low-cost airline carrier that operates in Mexico and portions of the United States. The company has seen huge growth since its founding in 2006 and offers a great chance to invest in a growing middle class in Mexico and future expansion.

Volaris is the second largest (by passengers) airline in Mexico behind Aeromexico. The company has a 13% market share, but is much larger in several key areas where it operates. The company will offer shares in Mexico and the United States. In the US, the shares will be offered as American Depositary Shares and are expected to price between $12 and $14.

Volaris has grown substantially since 2006. Back in its first year, Volaris had only five routes and four airplanes. The company now holds a key position in Mexico with 80 routes and 43 Airbus A320 aircraft. Volaris offers 235 daily flights to 30 Mexican and 10 American cities. Mexico has a "substantial presence" at the top 5 Mexican airports.

The company's strengths:

· Lowest cost structure

· Ancillary revenue generation

· Core focus on VFR, cost conscious business people and leisure travelers

· Disciplined approach to market and route selection

· Market leading efficiency and performance

· Brand recognition with a fast growing fan base

· Balance sheet positioned for growth

· Strong company culture, experienced management team and principal shareholders

The company's growth plan consists of:

· Remain the low cost carrier of choice

· Grow non-ticket revenue while maintaining low base fare to stimulate demand

· Gain additional market share by stimulating demand in our existing markets

· Continue our disciplined fleet growth

· Grow passenger volume by profitably establishing new routes

As of July 31st, Volaris had a 50% or higher market share in 51 of the 80 routes it operated. Volaris also has a high 75% market share of the Tijuana Airport, one of the busiest airports in Mexico. Volaris also has a market share of 53% in the North Pacific corridor of Mexico.

Volaris should see strong growth with a new fleet on its way. The company has commitments for 49 Airbus A320 aircraft. By 2020, the company hopes to have all A320s in operation, which would increase total seats by 21%.

Volaris has identified 180 routes in Mexico, which represents strong growth from the current 80 offered. The company should also expand routes to the United States for areas that have strong Mexican populations. Volaris entered the United States in 2009. In 2012, the United States represented 24% of Volaris's passenger revenue.

In 2012, Volaris had total revenue of $897.3 million. The company saw net income of $15.6 million. Average base fare for 2012 was $106 per person. Volaris does use promotional rates to maximize full capacity, often dropping flights as low as $38 per person. Recently, Volaris began un-bundling services, which has increased revenue. The company now charges for luggage over a certain weight and upgrades like extra leg room and choosing your seat first. These changes have helped boost non-ticket revenue and total revenue. Here is a look at recent revenue:

(In pesos)




Passenger Revenue

6.3 bil

8.0 bil

10.2 bil

Non Ticket Revenue

0.5 bil

0.8 bil

1.5 bil

Total Revenue

6.8 bil

8.9 bil

11.7 bil

There are several risks with investing in Volaris. The biggest risk is the shares are non-voting ADS. The company will have a high amount of outstanding shares, with limited voting rights for shareholders in Mexico. The company competes in a large market. Funding for additional aircraft through cash flow could cause financial problems down the road.

Mexico continues to grow and is the second largest economy in Latin America. The company has a population of 112 million and is expected to post growth of 1.4% in population annually. Gross domestic product and middle class continue to grow, giving investors more reasons to look for Mexican companies to profit from. As a low cost airline operator, I think Volaris offers a great way to play the growth of Mexico.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.