Geopolitical Uncertainty, Competition For Volaris Airline Parent Controladora Vuela Trigger Downgrade

Controladora Vuela Co Avcn SA CV (ADR) (NYSE: VLRS), the parent company of low-cost Mexican airline Volaris, recently reported first-quarter results that showed a loss for the quarter, while its operating revenues were up merely 2.7 percent year-over-year. The results were hurt by higher fuel prices.

The Analyst

Imperial Capital analyst Michael Derchin downgraded Controladora Vuela from Outperform to In-Line and lowered the price target from $12 to $7.50. The price target revision was attributed to lower unit revenues and higher jet fuel prices.

The Thesis

On the earnings call, the airline said it has limited visibility on second-quarter earnings due to macroeconomic uncertainty and did not provide EBITDAR margin guidance, Derchin said in a Monday note. The analyst lowered his earnings per share estimates for the company following the quarterly print. 

"While Volaris has an industry-leading cost structure, we have little visibility on earnings due to weakness in the domestic market and geopolitical uncertainty," Derchin said. 

Despite a strong business model with the lowest cost structure among its Mexican peers, the following macroeconomic headwinds are likely to hurt the airline, the analyst said:

• Fare pressure in Mexico due to competition among low-cost carriers.
• Overcapacity plaguing the domestic market for the foreseeable future.
• NAFTA negotiations and the upcoming presidential election in Mexico.
• Geopolitical volatility in the peso.
• Higher fuel prices.

The Price Action

The shares have lost about 12.6 percent year-to-date.

Reacting to the results, Friday the stock plummeted 19.61 percent to close at $7.01. Shares were trading down nearly 8 percent at $6.45 after the open Monday. 

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