The Spirit of Mexico: Like its ultra-LCC peers to the north, Volaris is growing fast and making lots of money

 Volaris is growing fast and making lots of moneyNot everything it touches turns to gold. Occasionally, Indigo Partners backs a wrong horse, like Mandala in Indonesia or Avianova in Russia. Volaris, however, is not one of those exceptions.

Like Spirit, Frontier and Wizz Air, all currently or at one time part of Indigo’s investment portfolio, Volaris is earning outsized profit margins while pursuing an ultra-low-cost business model. And as 2017 gets underway, the Mexican airline continues to expand beyond its borders.

At the start of this decade, calling Mexico’s airline industry a mess would have been too polite. It was more accurately a graveyard of one failed airline after another, which would have included the nation’s two largest airlines had they not been rescued in the 1990s by a government holding company that operated both separately but simultaneously. Eventually, Aeroméxico and Mexicana were fully privatized. But the latter didn’t survive long, succumbing to bankruptcy in 2010. Aeroméxico, however, emerged a winner, as did three low-cost carriers, which all launched in 2005 and 2006. One of these was Volaris, which Indigo partially bought in 2010.

But success, even under Indigo, wasn’t immediate. As late as 2014, with fuel prices still high and economic growth disappointing, Volaris managed an operating profit of just 1%, down from 2% the year before and 3% the year before that. The biggest problem was market overcapacity, with Mexico’s airlines— Volaris included—growing ASMs far ahead of GDP expansion. But then came 2015, when Volaris became an overnight profit superstar—its operating margin that year was 14%, more than double what either Aeroméxico or the upmarket LCC Interjet could muster. Only the much smaller ultra-LCC VivaAerobus came close. Capacity levels within Mexico remained high, but fuel prices were now low. And Volaris was simultaneously harvesting the benefits of a multi-year seating densification exercise. Ancillary revenues, furthermore, were soaring, reaching 24% of total revenues even despite being prohibited by Mexican law from charging for a first checked bag, the No. 1 source of ancillaries for an airline like Spirit in the U.S.

After growing roughly 8% annually from 2012 through 2014, air traffic volumes in Mexico jumped 13% in 2015 and 11% last year. Volaris itself saw…

The article you have previewed is premium content and available only to our paid subscribers. To continue reading become an Airline Weekly Subscriber today.

Click Here or the button below to sign up for a Free Trial.

Free Trial