Controladora Vuela (NYSE:VLRS) reported third-quarter financial results on Tuesday. The transcript from the company’s third-quarter earnings call has been provided below.
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Summary
Controladora Vuela exceeded financial guidance for Q3 2026 with a 25.3% EBITDA margin, despite higher-than-anticipated fuel prices.
The company achieved a significant milestone with quarterly operating revenue surpassing $1 billion, driven by a 19% increase in TRASM and 32% revenue growth.
Strategic focus on the U.S.-Mexico transborder market resulted in a 53% increase in revenues, enhancing its position as the largest carrier in this market.
International operations accounted for 42% of total capacity in Q3 and are expected to reach 49% in Q4, marking a strategic shift towards international growth.
The company secured a $300 million revolving credit facility to enhance financial flexibility and plans to reduce its fleet from 154 to 137 aircraft by 2027, improving lease liabilities and cost structure.
Guidance for Q4 2026 includes 4% ASM growth and a 20% EBITDA margin, with a focus on sustaining unit revenue momentum and optimizing the network mix.
The proposed merger with Viva is progressing, with approvals from U.S. and Colombian authorities, and ongoing discussions with Mexico’s National Antitrust Commission.
Management emphasized maintaining flexibility to adjust capacity based on market conditions, particularly in response to fuel prices and economic demand.
Full Transcript
OPERATOR
Good morning, everyone, and thank you for joining Controladora Vuela’s third quarter 2026 financial results conference call. All lines are currently in a listen-only mode. After the Company’s remarks, we’ll open the call for questions. Please note that today’s event is being recorded and webcast live on Controladora Vuela’s website. At this time, I’d like to turn the call over to Liliana Juarez, Investor Relations Manager. Please go ahead.
Liliana Juarez (Investor Relations Manager)
Welcome to our third quarter 2026 earnings call. Joining us today are our President and CEO Enrique Beltranena, our Airline Executive Vice President Holger Blankenstein, and our CFO Jaime Po. They will be discussing the Company’s results followed by a Q&A session. This call is for investors and analysts only. Please note that this call may include forward-looking statements under applicable securities laws. These are subject to several factors that could cause the Company’s results to differ materially, as described in our filings with the U.S. SEC and Mexico’s CNBV.
These statements speak only as of the date they are made and Controladora Vuela undertakes no obligation to update or modify them. All figures are in U.S. dollars compared to the third quarter of 2025 unless otherwise noted. And with that, I’ll turn the call over to Enrique. over to Enrique
Enrique J. Beltranena M. (Founder & CEO at Volaris (Member of the Board))
Good morning, everyone, and welcome to our third quarter 2026 earnings call. Despite a challenging environment, we executed against our plan, exceeded our financial guidance, and delivered positive EBIT, an outcome not contemplated in our original outlook. We achieved an EBITDA margin of 25.3%, above our 22% guidance, even though jet fuel averaged $3.67 per gallon versus our $3.50 guidance assumption. Crucially, we preserved strong liquidity, ending September with approximately $823 million, broadly unchanged quarter over quarter despite higher-than-anticipated fuel prices.
Strong operating cash flow and disciplined network management supported this result, with every flight required to generate a positive marginal contribution. At the same time, we continue reducing financial debt, strengthening our balance sheet, and preserving the flexibility to navigate the industry cycle and pursue long-term opportunities. Our strong performance was also reflected in our unit economics. TRASM reached $10.31, up 19% year over year and above guidance, driven primarily by stronger fare performance. At the same time, CASM ex-fuel came in at 6.23 cents, outperforming our guidance of 6.35 cents. Our underlying cost structure remains well controlled even as we absorb temporary fleet transition costs, positioning us to benefit from a more efficient cost base as the redelivery cycle progresses.
These results reflect more than favorable seasonal demand. They reflect deliberate decisions by a hands-on management team focused on three levers within our control: allocating capacity to the highest-return markets, improving aircraft productivity, and protecting profitability. I want to thank our ambassadors for the outstanding teamwork behind this performance. Together, our commercial initiatives offset about 49% of the year-over-year increase in fuel costs through higher revenues, helping mitigate the impact of elevated fuel prices.
The U.S.-Mexico transborder market plays a particularly important role in this strategy because it offers our strongest profitability and greatest ability to recover higher fuel costs through pricing. U.S. legacy carriers have been reducing capacity and raising fares in the market, widening the gap between their offerings and our ultra-low-cost fares and further strengthening our value proposition. This is where our ultra-low-cost carrier virtuous cycle becomes decisive.
As competitors pull back, we can redeploy capacity to the markets with the most attractive returns. Our widening fare advantage helps us capture demand; greater scale and aircraft productivity then reinforce our cost advantage and sustain profitable growth. Let me now connect those strategic choices to the actions behind our performance across the network, starting with our U.S.-Mexico transborder business. Transborder revenues grew by more than 50% year over year, supported by our expanding network, stronger brand presence, attractive yields, and healthy capacity absorption, contributing to stronger route-level profitability. Today, based on published fourth quarter schedules from OAG, Controladora Vuela is currently the largest carrier in the U.S.-Mexico transborder market in terms of seats.
This leadership position reflects years of network development and brand building as well as an intentional relocation of capacity to our market with higher relative profitability. It positions us to continue capturing opportunities in one of the world’s most important international aviation corridors. Our Central America–U.S. operations are also performing well, adding further momentum to our international network. Together, these results reinforce the value of the strategic investments we have made in these markets over the past several years, with total network international capacity accounting for approximately 42% of our total capacity in the third quarter. Going forward, international operations are expected to represent approximately 49% of our total capacity in the fourth quarter, the highest level in Controladora Vuela’s history, marking an important milestone in the evolution of our network and providing a natural exchange rate hedge.
In Mexico, we strategically increased domestic capacity by 11% during the third-quarter summer peak to capture stronger seasonal demand. The market absorbed that capacity. Peso-denominated base fares strengthened, and domestic load factor reached 88%. Our focus is not simply on filling the seats, but on maximizing the revenue and profitability generated by every seat we fly. Having captured peak summer demand, we have shifted our focus to preserving those unique revenue gains.
TRASM strengthened in September, and that momentum has carried into October as we enter the shoulder season. By adjusting domestic capacity to seasonal demand and expanding our international exposure—where yields and fuel cost recovery are strongest—we are sustaining unit revenue performance while protecting profitability. Another important driver of our third quarter performance was our disciplined management of aircraft utilization. As more aircraft returned to productive service, utilization increased 5% quarter over quarter, measured as ASMs per productive aircraft per day, allowing us to capture stronger summer demand while improving fixed cost absorption. We also generated approximately $30 million in fuel cost savings during the quarter, equivalent to 3.3 million gallons of fuel saved through initiatives aimed at improving operational efficiency.
Fuel efficiency reached 110 ASMs per gallon, a Controladora Vuela record and among the highest levels for narrowbody operators. These gains came from deploying more fuel-efficient new aircraft, particularly on longer international routes, improving aircraft-to-route assignments, and strengthening flight planning. While these operational improvements are delivering benefits today, our fleet transformation is creating an opportunity to structurally improve our cost base. Our GTF recovery continues to advance. We are now well past the peak of this disruption as engines continue to rotate through scheduled shop visits. We expect AOGs to remain in the low to mid-20s until next summer, with the situation expected to normalize by mid-2028.
As we right-size our contractual fleet from 154 aircraft at the end of the third quarter of 2026 to approximately 137 by year-end 2027, we expect to reduce lease liabilities by approximately $360 million relative to the third quarter 2026 level, equivalent to 10% of total debt at quarter end. We also expect approximately $50 million in lease savings in 2027 compared with full year 2026, improving earnings and free cash flow. This represents a significant structural improvement to our cost base and balance sheet by reducing fleet-related debt.
At the same time, we are taking other actions to enhance our financial flexibility. In addition to maintaining a stable cash position versus the second quarter, we have secured a $300 million revolving credit facility. As Jaime will discuss in greater detail, this facility provides additional financial flexibility and strengthens our access to institutional capital. Finally, I would like to update you on Mexico’s aviation safety oversight assessment. On October 16, the U.S. Department of Transportation revoked orders issued in October 2025 that had disapproved certain schedules filed by Mexican carriers and restricted flights from the Mexico City metropolitan area to the United States. Although the orders had limited impact on Controladora Vuela’s existing operations, their revocation now allows Mexican carriers to continue expanding capacity from the metropolitan area—something really important given the changes in capacity in the United States.
Turning to the FAA’s ongoing IASA assessment, we believe the risk of Mexico being downgraded again has been significantly mitigated. The Mexican government has announced concrete measures to strengthen AFAC’s oversight capability. These developments concern Mexico’s broader regulatory oversight framework rather than Controladora Vuela’s individual operating performance. Even so, they matter to the entire aviation industry, and we support the Mexican authorities’ efforts to address the bilateral issues and the FAA’s observations while preserving the conditions for continual connectivity, growth, and safety.
As we conclude, I want to emphasize that our third quarter performance represents more than a successful summer season. It demonstrates our ability to execute in a challenging environment, to make disciplined commercial decisions, and to translate those decisions into tangible financial results. But perhaps more noteworthy, we are progressively transforming the underlying economics of Controladora Vuela. We’re building a network increasingly focused on markets where our competitive advantages are strongest.
We’re improving productivity across our fleet, and as the GTF recovery progresses, we are creating the opportunity to operate more efficiently with fewer contractual aircraft and lower structural ownership costs. As we look toward 2027, our focus remains clear: protect our financial strength, continue improving our structural cost position, and convert our competitive advantages into sustainable, profitable, and long-term shareholder value. With that strategic context, I will turn the call over to Holger to discuss how our commercial execution, network allocation, and customer strategy are translating into stronger unit economics.
Holger Blankenstein (Airline Executive Vice President)
Thank you, Enrique. Building on Enrique’s strategic overview, I will focus on three commercial priorities: sustaining unit revenue momentum, improving our network mix, and increasing the value of each customer relationship. First, stronger commercial execution is lifting revenue productivity. TRASM increased by 19%, exceeding guidance, as 11% ASM growth was absorbed at stronger yields. Average base fares rose by 26% and consolidated revenue increased by 32%. The market absorbed the additional summer capacity with consolidated load factor reaching 85.7%, 88.2% domestically and 82.2% internationally. Combined with stronger base fares, this performance increased unit revenue and helped offset approximately half of the year-over-year increase in fuel costs.
The strongest proof point was our U.S.-Mexico transborder market where revenues rose by 53% year over year. By directing incremental flying towards this stronger demand and pricing environment, we fully recovered the year-over-year increase in fuel costs in our cross-border business while expanding our market presence. Second, network optimization is producing a structurally stronger business mix led by the scale and attractiveness of the U.S.-Mexico corridor. Mexico is the largest single-country international air travel market for the United States, generating more than 40 million nonstop passenger journeys in 2025, approximately one in every six U.S. international air passenger movements. The corridor combines scale with diversified demand across tourism, business, trade, and family ties.
That diversity supports repeat travel, improves resilience, and provides a stronger foundation for margin expansion and lower earnings volatility. As Enrique noted, our capacity shift toward this market is intentional and return-driven. In the domestic market, our value-conscious customers continue to respond positively to our ultra-low-cost proposition despite a softer macroeconomic environment. Strong demand and higher peso-denominated base fares boosted domestic unit revenues during the summer peak. Following the summer peak, we expect domestic capacity to remain virtually flat year over year for the full year 2026, reflecting our disciplined approach to aligning capacity with seasonal demand.
Aligning supply with seasonal demand protects route-level economics and releases aircraft for higher-return international opportunities. This improves returns on deployed capital without requiring equivalent fleet growth. Third, Altitude is increasing the value of each customer relationship. Ancillary revenue per passenger rose to $61 from $56 a year ago. While the platform supports greater retention, purchase frequency, and lifetime customer value without compromising our ultra-low-cost proposition, our priority segment is the multi-reason traveler—customers who choose Volaris to visit friends and relatives, for leisure, and for business. Serving more of their travel needs increases engagement and our share of wallet.
The economics are compelling. A customer traveling for two different reasons travels about three times more than a regular customer. A multi-reason traveler may travel up to 12 times as much as a single-reason traveler. This creates a significant opportunity to deepen customer engagement, increase revenue per customer, and unlock greater lifetime value. Multi-reason travelers already represent approximately 17% of our customer base, providing a meaningful installed base for Altitude to engage and grow.
Over the past year we brought our co-branded credit card, subscription programs, and the new POINTS program together under Altitude, an integrated frequent flyer platform designed to reward higher-frequency customers across more of their travel needs. Historically, our memberships and co-branded credit cards operated as successful standalone products. Today, Altitude brings more offerings together in one integrated ecosystem. Customers receive more relevant rewards across their travel needs while Volaris gains a scalable platform to strengthen retention, increase purchase frequency, and grow revenue per passenger.
In a little over a year, Altitude has reached 2.3 million active members. Our focus now is to convert that scale into higher engagement, travel frequency, spend, and customer lifetime value. Altitude increases the value of choosing Volaris through relevant rewards and continued flexibility. For investors, it creates incremental revenue from the existing customer base while preserving the affordable fares at the core of our ultra-low-cost model. We will extend this engagement strategy through Starlink high-speed Wi‑Fi expected next year. Connectivity will strengthen the travel experience and create additional opportunities for digital engagement, ancillary revenue, and loyalty. Operational reliability remains central to delivering a superior customer experience. In the third quarter, on-time performance reached 83.7%, improving 1 percentage point year over year, contributing to a strong net promoter score of 38, a solid result for an ultra-low-cost carrier.
Turning to the fourth quarter, our priorities remain consistent: sustain unit revenue momentum, continue improving the network mix, and deepen customer value. Healthy load factors and strong last-minute bookings in October support these objectives. As we enter the shoulder season, we expect total ASM growth of approximately 4% year over year in the fourth quarter, bringing full-year capacity growth to approximately 5%. This measured growth prioritizes revenue quality and return potential over volume.
Within that total, we expect domestic capacity to decline by mid-single digits during the shoulder season, supporting pricing and route-level profitability while helping offset higher fuel costs. At the same time, international ASMs are expected to grow in the high teens as we reallocate capacity towards markets with stronger demand, pricing, and returns. This includes moving five new U.S. routes forward from December to October and launching service to Atlanta, Boston, Nashville, Raleigh, and Washington, D.C. As a result, international operations are expected to account for almost half of fourth-quarter capacity, the highest level in Volaris history. This structurally better mix supports margins, diversifies revenue, and strengthens our natural hedge against U.S. dollar-denominated costs, reducing exposure to any single market and helping moderate earnings volatility.
For the fourth quarter, we expect approximately 17% year-over-year TRASM growth. Targeted international growth, domestic capacity reductions, and continued ancillary contributions should support stronger unit revenue and profitability. Looking ahead to 2027, we intend to sustain stronger unit economics, allocate aircraft to the markets with the most attractive returns, and deepen customer engagement through Altitude. We expect domestic capacity to contract while international capacity continues to expand, resulting in low single-digit ASM growth for the full year.
By improving aircraft productivity, optimizing the network, and increasing revenue per customer, we aim to convert commercial momentum into stronger margins and more efficient capital deployment. With that commercial outlook established, I will now turn the call over to Jaime to cover the financial results, balance sheet actions, fleet economics, and guidance.
Jaime Pous (Chief Financial Officer)
Thank you, Holger. I will now connect those commercial drivers to our financial results, balance sheet actions, and fleet economics. In the third quarter we exceeded our profitability guidance despite higher-than-anticipated fuel cost, preserved liquidity, and continued reducing financial obligations. A key driver of this outperformance was the stronger unit revenues. This quarter our capacity returned to essentially the same ASMs as in the third quarter of 2023 before the engine groundings, and at the same capacity, we generated 22% more revenue.
This reflects the combined contribution of stronger pricing, effective revenue management, and strategic network optimization. Our commercial momentum translated into a historic milestone for Controladora Vuela. For the first time, quarterly operating revenue surpassed $1 billion, up 32% year over year. This growth came from both volume and price. ASMs grew 11% as our fleet recovered and TRASM rose 19%. Regarding FX, the Mexican peso appreciated 7.5% on average against the U.S. dollar compared with the same period of last year, supporting a more favorable translation of domestic revenues. This benefit was partially offset by the higher dollar translation of our peso expenses. Moving to costs, CASM reached 9.97 cents, increasing 26% year over year, primarily driven by a 57% increase in average economic fuel cost per gallon. U.S. Gulf Coast jet fuel prices averaged $3.67 per gallon versus the $3.50 per gallon assumed in our third quarter guidance, contributing to approximately $16 million in additional fuel costs.
CASM ex fuel came in at 6.23 cents, outperforming our 6.35 cents guidance, the result of continued cost control initiatives, operational efficiencies, and improved fixed cost absorption as we operated slightly more capacity than initially planned during the quarter. While the broader airline industry continues to face structural cost pressures, particularly labor inflation, Controladora Vuela’s current cost structure reflects temporary costs associated with aircraft redeliveries and accelerated engine maintenance. We are actively managing these pressures through a comprehensive cost control program targeting over $100 million in savings for 2026 while improving aircraft productivity and operating efficiency.
As these transitional expenses subside, we expect the benefits of our fleet optimization strategy to become increasingly visible in our cost structure. Separately, the other operating income line included $9.1 million in sale-and-leaseback gains associated with the delivery of three new A321neos during the quarter. This line also includes our aircraft grounding compensation from Pratt & Whitney. Turning to profitability, the third quarter EBITDA reached $263 million, representing a 25.3% margin, more than 3 percentage points above our guidance. We delivered these results despite fuel prices exceeding our assumptions, as stronger unit revenues, improved aircraft productivity, and continued cost discipline more than offset the pressure and drove profitability ahead of expectations. We also delivered positive EBIT of $34 million with a 3.3% margin, a significant improvement.
Sequentially, net loss narrowed nearly 80% versus the previous quarter to $26 million, reflecting a stronger operating performance and disciplined cost management. Turning to cash flow and balance sheet performance, we generated $234 million in cash from operating activities during the third quarter, while cash used in investing and financing activities totaled $36 million and $271 million, respectively. Capex was $61 million, reflecting planned heavy maintenance events to prepare for off-lease redeliveries and Pratt & Whitney engines’ return, bringing capex for the first nine months of 2026 to $297 million.
Turning to our balance sheet, our financial discipline continues to reinforce our resilience. During the quarter we preserved liquidity, reduced financial debt, and secured additional committed funding. Controladora Vuela ended September with a liquidity position of $823 million, flat sequentially and meaningfully above year-ago levels, representing 23% of last 12 months’ total operating revenues. This reflects our disciplined approach to cash preservation, careful capital deployment, and focus on operating routes that generate positive cash contribution.
We also reduced our financial debt balance by 14% quarter over quarter, amortizing $95 million without taking on new financial debt. Our financial debt is now nearly back to pre-GTF grounding levels in 2023, before we implemented a series of mitigation measures in subsequent years including spare engine acquisitions and related financing. At quarter end our net debt to EBITDA ratio stood at 3.3 times. Our financial resilience and increasingly diversified business model continue to earn the confidence of leading financial institutions. During the third quarter we secured a $300 million revolving credit facility with a diversified syndicate of leading Mexican and international banks, building on the engine financing facility completed in the second quarter. Together these transactions reinforce our strong access to institutional capital, diversify our funding sources, and enhance our financial flexibility, with the revolving credit facility remaining fully undrawn at quarter end.
Now turning to our fleet plan and engine availability, our GTF recovery continues to advance. In line with our plan, aircraft on ground averaged 21 during the third quarter, down from 36 in the first quarter and 41 at the beginning of the year. We expect AOGs to remain in the low to mid-twenties until next summer as engines continue to rotate through scheduled inspections. As of September 30, our fleet consisted of 154 aircraft with an average age of 6.7 years, with 71% of the fleet being fuel efficient.
Building on this fleet profile and the continued GTF recovery, we are taking concrete steps to improve aircraft productivity and rightsize our contractual fleet. We expect to end 2026 with 149 aircraft and reduce our contractual fleet to around 137 by the end of 2027, reflecting the strategic decisions we have already made to better align fleet commitments with engine availability and market conditions. Our plan incorporates scheduled lease returns and planned aircraft sales.
In parallel, we rescheduled all seven 2027 Airbus deliveries, and 11 2028 deliveries deferred to 2032. These decisions allow us to better synchronize fleet requirements with the return of engines from inspections while matching capacity deployment to seasonality and market demand. They also position us to receive future aircraft equipped with more advanced GTF Advantage engines, further supporting our long-term efficiency objectives. Our 2027 base case anticipates low single-digit ASM growth, driven by the progressive return of aircraft to productive service and higher utilizations, without any new aircraft deliveries.
This approach enables us to generate more capacity from a smaller contractual fleet while retaining the flexibility to adjust growth as market conditions evolve. Financially, this strategy reduces fleet-related obligations on both our balance sheet and our cash flow while supporting a more productive operation. On the balance sheet, we expect lease liabilities to decline from approximately $3.2 billion to $2.8 billion by year end 2027. On cash flow, we expect lease payments to be approximately $50 million lower than in full year 2026.
In addition, with no aircraft deliveries or related PDP obligations in 2027, the deferrals are expected to reduce PDP-related equity cash requirements by approximately $38 million. Ultimately, we are aligning fleet commitments with productive capacity and market demand, allowing us to drive higher aircraft productivity with no incremental fleet-related debt. Together, these actions reinforce a more productive and capital-efficient operating model, strengthening our long-term earnings potential.
With that, let me turn to our fourth quarter and full year outlook. Looking at the rest of 2026, our priorities are to sustain commercial momentum, actively manage the fuel cost environment, and preserve balance sheet strength. With those priorities in mind, our fourth quarter expectations are as follows. For the fourth quarter of 2026 we expect ASM growth of roughly 4% year over year, supported by a seasonalized capacity in the lower fall season and growth concentrated in the transborder market; TRASM of around 10.90 cents; CASM ex fuel of approximately 6.50 cents; and an EBITDA margin of around 20%. Our fourth quarter guidance assumes an average foreign exchange rate of around 18.17 pesos per U.S. dollar and an average U.S. Gulf Coast jet fuel price of approximately $4.40 per gallon.
Regarding our fourth quarter cost outlook, our CASM ex fuel guidance reflects our strategic shift toward higher-return transborder markets where U.S. station costs are higher, but stronger yields and revenue opportunities support attractive route-level economics. Our guidance also includes approximately 0.4 cents in non-recurring costs related to aircraft redeliveries, accelerated engine maintenance, and merger-related expenses. For full year 2026, we now expect ASM growth of approximately 5% year over year, an EBITDA margin of around 21% primarily driven by higher fuel price assumptions, and capex of around $350 million.
In summary, the quarter demonstrated progress across the following: stronger revenue productivity, disciplined network and cost management, preserved financial flexibility, and continued fleet recovery. As we move into 2027, we are focused on translating these improvements into greater operating efficiency, stronger capital productivity, and sustainable earnings power while preserving the flexibility to navigate changing market conditions. Now I will turn the call back over to Enrique for closing remarks.
Enrique J. Beltranena M. (Founder & CEO at Volaris (Member of the Board))
Thank you, Jaime. Today’s discussion sends a clear message. Disciplined commercial execution is strengthening unit revenue, network and fleet optimization is improving productivity, and continued balance sheet discipline is protecting our financial flexibility. Our third quarter results show that Volaris has a strong, improving standalone business supported by disciplined execution, a more productive fleet, and a stronger financial foundation. Before concluding, let me briefly address our proposed combination with Viva. Our proposed combination builds on our standalone strengths and represents an opportunity to accelerate long-term value creation. The strategic rationale remains compelling.
By bringing together two highly compatible ultra-low-cost airlines under a common holding company while preserving their distinct brands and independent operations, we see opportunities to unlock economies of scale, improve fleet ownership economics, strengthen access to capital, and support sustainable growth while preserving the ultra-low-cost model and further democratizing air travel in the markets where we operate. Importantly, our vision is not simply about becoming a larger airline group.
It is about building a more efficient, financially resilient aviation platform that can expand affordable connectivity while creating sustainable value for shareholders. On the regulatory front, we continue to engage constructively with Mexico’s National Antitrust Commission, providing the required information and addressing questions raised throughout the review process. We are committed to demonstrating the benefits of the proposed transaction within the applicable regulatory framework. Subject to the remaining regulatory approvals and customary closing conditions, we are committed to completing the transaction over the coming months.
We will now open the call for questions.
OPERATOR
Certainly. Ladies and gentlemen, if you do have a question at this time, please press star 11 on your telephone. If your question has been answered and you’d like to remove yourself from the queue, simply press star 11 again. Our first question comes from the line of Michael Linenberg from Deutsche Bank. Your question please.
Michael Linenberg (Analyst at Deutsche Bank)
Yeah. Hey. Hey. Good morning everyone. I just have a couple questions here. I know next year you’re preparing or planning, I should say, low single-digit ASM growth. How should we think about the split between domestic and international? It does seem like you’re making a pretty meaningful push international. Does that continue into next year and does that drive most of the capacity growth?
Holger Blankenstein (Airline Executive Vice President)
Hi, Michael, this is Holger here.
Michael Linenberg (Analyst at Deutsche Bank)
Hey, Holger.
Holger Blankenstein (Airline Executive Vice President)
So for 2027, as you rightly say, our base case is low single-digit ASM growth. And that is primarily driven by aircraft returning to productive service, but also high utilization rather than new deliveries, as Jaime pointed out in the prepared remarks. And we are maintaining the flexibility to adjust that growth rate as market conditions evolve. If we look at the split between international and domestic, we are seeing a decline for the domestic market, a slight decline, low- to mid-single-digit decline in the domestic capacity for next year. And then the balance will be international growth to get to that mid- to low-single-digit positive growth next year overall.
Michael Linenberg (Analyst at Deutsche Bank)
Okay, great. And then, I guess, you know, maybe I’m not surprised that one is going to be much more of a focus of growth at the expense of the other. Based on what you’re currently seeing with respect to fuel recovery. Holger, if I heard you correctly earlier, the transborder markets were fully recovering the higher fuel price. And so assuming fully that it’s called as close to 100% as possible, the company as a whole, though, recovered roughly half.
So does that suggest that within your domestic network your recapture or recovery of the higher fuel prices is down in sort of the 20–25% range? Can you just clarify that? It just seems like there’s a huge divergence between your ability to recover transborder versus domestic. Thanks for taking my questions.
Holger Blankenstein (Airline Executive Vice President)
Yeah, Michael, your assessment is correct. The transborder market, the pricing absorption has been a lot stronger. We’re obviously also growing more in the U.S. market. In the domestic market, we do have a fuel subsidy for the buses, a diesel subsidy, which limits our ability to pass through to higher prices, the fares.
Michael Linenberg (Analyst at Deutsche Bank)
Great, thank you.
Enrique J. Beltranena M. (Founder & CEO at Volaris (Member of the Board))
If I can add something on. Holger, this is Enrique. I think this supports the very important strategy of shifting capacity towards the U.S. transborder market, where we are really recovering not only the cost part, but the profitability is being produced while we are in both markets protecting our marginal contribution and the cash flow.
OPERATOR
Thank you. Our next question comes in the line of Duane Flemingworth from Evercore. Your question please.
Duane Flemingworth (Analyst at Evercore)
Hey, thank you. Good morning. Just on FX, can you remind us what the impact is to your P&L? I think fourth quarter is the first quarter since maybe the second quarter of last year where the peso is a little softer year over year. So what is the impact on revenue or yields, your non-fuel unit cost, and margins for Volaris as we transition to this modestly softer peso regimen?
Jaime Pous (Chief Financial Officer)
Hello, Dwayne, this is Jaime. For FX, for every 5% peso depreciation versus the U.S. dollar, EBITDA margin decreases around 0.2 percentage points, while EBITDA margin declines by around 0.9 percentage points.
Duane Flemingworth (Analyst at Evercore)
Great, very clear. And then just sorry, we’ve been juggling multiple calls today. Sorry to make you repeat this, but is the plan for what period were you referring to when you said low single-digit ASM growth, more capacity from a smaller fleet and domestic down, international up? Is that a fourth quarter comment or is that a 2027 comment? And if it is 2027, maybe you could provide some color on the shape of that as we think about the earlier part of the year versus the second half.
Thanks for taking the questions.
Holger Blankenstein (Airline Executive Vice President)
Hey Duane, this is Holger. So I was referring to the full year 2027, mid- to low-single-digit positive growth, less in domestic, more in the international. And that’s going to be very similar throughout the quarters during the year.
Duane Flemingworth (Analyst at Evercore)
Okay, very good. Thank you.
Holger Blankenstein (Airline Executive Vice President)
I do want to highlight that given the volatility we’re seeing in the market and in the world as a whole, we are approaching the capacity of 2027 with a lot of flexibility built into our business model. So we don’t want to lock ourselves into a static network plan with fuel being all over the place. We have the flexibility to adjust capacity based on where fuel stands, FX, and the profitability of every single route as a whole. So we’re going to readjust the network as the year progresses.
So I want to leave you with the idea that we have flexibility built into our fleet plan.
OPERATOR
Thank you. And our next question comes from the line of Rogerio Arojo from Bank of America. Your question please.
Rogerio Arojo (Analyst at Bank of America)
Hi guys. Morning. Thanks for the opportunity to make the questions. I have two. The first one, could you provide an update on the Viva Robust merger including the key next steps? Media is reporting a potential approval of the antitrust authority by year end. Do you agree with that time frame? And with no or only limited remedies, when would you expect the integration process to begin? And later on on the guidance, it seems it implies a more pressured fourth-quarter results than what was in the prior year outlook. Is that entirely fuel driven and how much of this potential margin drop is related to that? And how much recapture is that in the fourth Q implied numbers as well? Thank you.
Enrique J. Beltranena M. (Founder & CEO at Volaris (Member of the Board))
Thank you very much. This is Enrique. I think the regulatory review is progressing. We can say that we obtained approvals from the DOJ in the U.S. and the Colombian Competition Authority and we remain very actively engaged with Mexico’s National Antitrust Commission. Having said that, we are still at the level of the technicians requesting information and requesting data that they need in order to raise the issue to the upper-level commission. Beyond what we have publicly disclosed, there is nothing further we can comment on while the regulatory process is ongoing. I’m sorry. And it’s simply, it’s not that we’re trying to hide something. It’s simply we don’t know anything further.
Something important that I said, I didn’t say end of the year, I said in the following months. And that’s something very important. We depend totally on the commission to have an end result in the process. And now let me pass it over to Jaime to respond to the second part of your question.
Jaime Pous (Chief Financial Officer)
Hi, this is Jaime. With respect to guidance, basically the effect is the higher Gulf Coast price that we are forecasting. The 4.4 that we mentioned is directly driven by that. In terms of fuel recapture, I think the trend of the revenue continues to be the same as the third Q. But we are facing a higher fuel price.
Rogerio Arojo (Analyst at Bank of America)
Fair enough. That’s very clear. Thank you.
OPERATOR
Thank you. And our next question comes from the line of Julia Orsi from JP Morgan. Your question please.
Julia Orsi (Analyst at JPMorgan)
Yes, hello everyone. Good morning. So thank you for taking the time. So just a follow-up on the supply and demand balance that you’re seeing on the international market, especially for next year. This is usually the segment that airlines are focusing the most. So are there any risks of a potential, let’s say, more aggressive landscape from competitors on the international market? Thank you.
Holger Blankenstein (Airline Executive Vice President)
Thanks, Julia. This is Holger again. So on the transborder market, it’s been quite an interesting market. Our cross-border results really reflect years of network development and brand building in the U.S. market, and that allows us to have structurally robust yields and margins in that market. We expect our brand relevance and the strength of our low-cost advantage and value proposition to continue to set us apart from our competitors and U.S. legacy airlines.
We have a significant fare difference to U.S. airlines and for that reason we do see a long-term growth potential in the transborder markets through the next years. It’s the largest transborder market in the world and we currently have only 23% of that market in terms of seats. That’s the third quarter. So we remain focused and we believe the transborder market continues to be an opportunity for us in terms of capacity. Obviously, we’re going to do that growth with discipline and we are only going to grow into markets and into routes where we see clear economic contribution. So to your question, we continue to see growth potential in the U.S. market.
Julia Orsi (Analyst at JPMorgan)
Got it. Super clear. Thank you.
OPERATOR
Thank you. And our next question comes from the line of Jens from Morgan Stanley. Your question please.
Jens (Analyst at Morgan Stanley)
Yes, hello everybody. So I have also a couple of questions. I want to ask again on the strategy to shift capacity to the international market, especially the U.S. I mean, obviously there’s still uncertainty on the potential downgrade of Mexico to Category 1 or keeping the current status. But assuming that there is a downgrade, how much would that imperil your strategy to shift capacity to the U.S. market? In other words, is the current run rate of what you already shifted enough to still grow in that market or would you need to rethink that strategy significantly?
Enrique J. Beltranena M. (Founder & CEO at Volaris (Member of the Board))
This is Enrique. I’m sorry, I think you didn’t hear that. The Mexico authority has taken very concrete actions and they are on their way to strengthen the aviation oversight to maintain the category. I think from the 21 technical, operational, and administrative observations out of more than 340 items reviewed, the government is really doing great efforts with greater resources: a record 1.4 billion AFAC budget, a 56% higher than 2025, more than 100 additional inspectors in both 2026 and 2027, and nearly quadrupling the inspector workforce versus 2024.
I think if you look at those actions altogether with the agreement that they were able to achieve in terms of the metropolitan area, Mexico has done tremendous progress during the last months trying to stabilize the relation in the bilateral field. So I think we will continue working together with the authority, trying to prevent something like a decategorization from Category 1 to Category 2 in the following months. And our commitment—despite it is a governmental problem, and what they are trying to qualify is the AFAC capacity for surveillance—we think we’re doing the right things together with the government to guarantee that Mexico stays in the right position.
Holger Blankenstein (Airline Executive Vice President)
And then, Jens, just to build on Enrique’s remarks, what does that translate to for our business? So yes, the run rate of the capacity we added this year will sustain next year’s U.S. growth into positive territory. And we are currently evaluating additional opportunities now that the Mexico City metro area is back open for additional growth into the U.S.
Jens (Analyst at Morgan Stanley)
Okay, fair enough. Perfect. Yes. And one other question. On the aircraft on ground that you currently have, I think you mentioned 21 currently, right, and then low to mid 20s for 2027. So basically the amount will slightly increase in 2027 in the next two quarters, or how will be the progression throughout next year? Just trying to understand that.
Jaime Pous (Chief Financial Officer)
This is Jaime. This year, remember, we started the year with 41, having an average of 36 planes in the first quarter, going down to a 24 average in the second quarter, and going down to 21 in the third quarter. The number is going to remain in the low 20s. It’s just basically engines rotating. You send some engines to the shops, they do the turnaround, they come back, and you send another one. So it’s going to be dancing, depending on the day you take the pictures, between 20 and 25.
And that will remain until summer next year. And then you are going to see a further reduction towards the second half of next year to probably close next year at around 10 to 15, depending on the timings on the shops that Pratt provides. That is our forecast today, and that’s what we are planning the rest of the year and 2027.
OPERATOR
Thank you. And our next question comes from the line. Philippe Nielsen from Citi, your question please.
Philippe Nielsen (Analyst at Citi)
Hello. Thanks for taking my question. So my question is more still related on the fleet plan. You mentioned you have a lot of flexibility to adjust your capacity growth as you’ve been mentioning in the call. I just wanted to understand how this translates with your current plan, which, and according to what I have in the numbers here, hasn’t changed much from previous earnings and expectations. How are you planning? Do you have flexibility to still adjust your fleet plan or are you looking at this flexibility in other ways?
Like you already see utilization at good levels and you maybe could reduce it a little bit to reduce capacity growth if you need, if fuel continues high. Just wanted to get your sense on where this fleet flexibility and this capacity flexibility would come from. And just to a second point, how this translates into your CASM ex fuel expectations to 2027. Thank you.
Jaime Pous (Chief Financial Officer)
Hi, Felipe, this is Jaime. We still maintain flexibility for next year in terms of capacity, either to grow or to reduce capacity. Remember, that plan of the strategy was to have some aircraft and engines unencumbered so that gives us the flexibility in case we see still a high fuel environment and we need to reduce capacity that is not covering marginal contribution. To sell those aircraft, we have three aircraft unencumbered that we can sell next year to reduce capacity.
In addition, if we want to grow, we have nine redeliveries next year that we make decisions probably for the second half of the second-half redeliveries. I think in the first quarter and the second quarter we are already set on the expectations based on the fuel cost. But we maintain that flexibility that we always talk about, that we are able to grow by 3% or reduce capacity by 3% depending on how the market is. Remember cost, and I’m going to talk in general in cost. Before discussing 2027, I’m going to put our current cost base into context. We have five factors that have shaped our current cost base. The industry-wide inflation, a higher cross-border mix, maintenance events related to the redeliveries and GTF-related grounding, and MRO-related expenses. Out of these five, the first two are structural. Although our cross-border expansion, as Holger mentioned, delivers stronger route economics and supports margins.
The other three are temporary and together represent around 0.40 to 0.45 cents of CASM ex fuel for this year and for next year. All those pressures will unwind after 2027, and we see our CASM ex fuel normalizing back into the 5-cent range during 2028.
Philippe Nielsen (Analyst at Citi)
Great. This is very helpful. Thank you again.
Enrique J. Beltranena M. (Founder & CEO at Volaris (Member of the Board))
I’m sorry, I just want to be very clear. I think it is important for everybody to understand that we will be allocating capacity, with all this flexibility we have, to the highest-return markets. The objective is really clear: to continue protecting profitability and utilization. Not capacity for capacity’s sake. Where we want to allocate capacity, where demand supports attractive returns, we will deploy capacity there and only there. Where economics deteriorate, we will move capacity out and reduce frequencies or take the capacity away from there. And we will guarantee that the results continue and that what we have achieved in terms of TRASM continues shifting into the future. Not only into the fourth quarter, but into the next year.
OPERATOR
Thank you. And our next question comes from the line of Alberto Valerio from UBS. Your question please.
Alberto Valerio (Analyst at UBS)
Hello, good morning. Thanks for taking my question. I have two here about the tax reform. If you could measure any impact for Volaris on this 1% tax from revenues. And the second one, if you see any structural change for demand for beach in Mexico, like Cancun or other destinations in the Pacific. Thank you very much.
Jaime Pous (Chief Financial Officer)
Hi, this is Jaime. On the tax reform, we see two main impacts for next year. The increase on the navigation cost by the Mexican authorities—that amounts to around an incremental cost of $13 million for next year. And the second one, the increase on the non-immigrant tax, the DNR, which is basically increasing 17%, which is going to be passed through to the passenger. But those are the two main effects from the tax reform. And if you can repeat please, the second question.
Alberto Valerio (Analyst at UBS)
Thank you, Jaime. It’s about the structural demand for the beaches of Mexico. If you see any change on this demand that this year was a little bit soft, and then one year pure.
Enrique J. Beltranena M. (Founder & CEO at Volaris (Member of the Board))
We are structurally changing or evolving our business model. We have been evolving that over the last two years, where we are preserving our VFR core and USCC proposition while attracting more multi-reason customers both in the domestic market and in the US market. And the network fortifications we’ve done and the targeted marketing we’ve done this year and last year is precisely to attract the higher-value customers. And that’s where we stand.
Alberto Valerio (Analyst at UBS)
Thank you so much.
OPERATOR
Thank you. This does conclude the question and answer session of today’s program. I’d like to hand the program back to management for any further remarks.
Enrique J. Beltranena M. (Founder & CEO at Volaris (Member of the Board))
Thank you so much. This is Enrique Beltranena. As always, it is an honor to speak to our Volaris family of ambassadors as well as our board of directors, investors, bankers, lessor suppliers on these calls. Our management team is extremely proud of Volaris Breakdown foundation and two decades of evolution into a leading carrier. And we’re excited for all of the runway it has left ahead. We look forward to entering the fourth quarter with continued momentum and continuous discipline.
This morning Renato was asking me if I was going to wish you Merry Christmas. I wish you all Merry Christmas.
OPERATOR
Thank you, ladies and gentlemen, for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.
Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company’s SEC filings and official press releases. Corporate participants’ and analysts’ statements reflect their views as of the date of this call and are subject to change without notice.
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