Grupo Aeroméxico, S.A.B. de C.V. (AERO) Earnings Call Transcript

Good morning, and welcome to Aeromexico's Third Quarter 202 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. Now I would like to hand the conference over to Ms. Lucio Medina, Head of Investor Relations. Ms. Medina, you may begin.

Good morning, everyone. Joining me today to discuss our results are Andres Conesa, Chief Executive Officer; Aaron Lure, Chief Commercial Officer; and Ricardo Sanchez Breaker, our Chief Financial Officer. Before we get started, I would like to take this opportunity to remind you that during the course of this call, we will present results that are based on our unaudited consolidated financials. Accordingly, the financial results discussed today are based on information available to us as of the date of this call and are not a comprehensive final statement of our financial results for any period presented. We may make forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act regarding future events and our company's future performance. We caution you that several important factors could cause actual results to differ materially from any plans and expectations expressed in this call, including the risk factors disclosed in our SEC filings. During this call, we will present certain non-IFRS financial measures. We have included a reconciliation and explanation of adjustments and other considerations of our non-IFRS measures to the most comparable IFRS measures in earnings release. Both our call and the earnings release are available on our website. It is now my great pleasure to turn the call over to Andres Conesa.

Thank you, Lucero, and good morning, everyone. I appreciate you joining us today to discuss our third quarter 2026 results. We delivered strong third quarter results, reflecting once again the resilience and unique strengths of Aeromexico's business model. These results also demonstrate the significant progress we have made in recent years to build a stronger and more flexible company, better positioned to navigate periods of uncertainty, including today's high fuel cost environment. I would like to thank the entire Aeromexico team for their commitment and discipline in executing through a challenging environment. By putting our customer first, while maintaining strong cost control, the team continues to protect the quality of our service and capitalize on attractive revenue opportunities. EBIT margin reached a strong 12%, supported by record quarterly revenue that came in above the midpoint of the June guidance range. In a quarter defined by higher-than-expected and volatile fuel prices, delivering a double-digit EBIT margin is a significant achievement. It demonstrates the strength of our business, our ability to capture premium revenues and the disciplined execution of our teams. Demand remains healthy, supported by a successful peak season that extended through September and delivered outstanding load factors. We also continue to see strong contributions from our premium products and loyalty program, which enhance our offering and reinforce customer preference for Aeromexico. Premium revenue represented 42% of total revenue, up 1 percentage point year-over-year, while loyalty penetration reached 40%, an 8-point increase versus last year. Total revenue grew 14% year-over-year, driven by premium and other revenue streams, including cargo and loyalty. Together, these factors, along with [ cost ] [indiscernible] revenue management initiatives supported our performance during the quarter. Capacity increased by around 1% year-over-year in the third Q and as the temporary negative impact of the World Cup in June and July normalized, we saw a clear improvement in those factors. August reached 90% and September recorded 87%, which is a very strong level for a shoulder season month following the summer peak. More importantly, forward bookings remain strong, supporting a constructive outlook for the remainder of the year. This gives us confidence that underlying demand trends remain solid and that our capacity is well aligned with market conditions. Revenue growth more than offset the year-over-year increase in fuel costs despite jet fuel prices being generally above our guidance. Fuel costs increased by approximately $170 million year-over-year in the third Q, including nearly $93 million above the guidance we shared with you in early July. However, revenue growth was not enough to offset the combined increase in fuel and nonfuel costs. In addition to the higher-than-expected sale expense, we experienced an anticipated increase in nonfuel costs derived on inflationary pressures and unexpected cost pressures resulting from the appreciation of the Mexican peso. Even so, our teams responded to revenue initiatives, [ fee ] recapture actions and disciplined capacity deployment enabling us to deliver a very strong level of profitability in the quarter. This third Q also show early signs of a better cost ex-fuel trajectory. Some pressures including FX started to normalize, and our teams continue to manage the cost base with discipline. Looking ahead, as operating leverage yields, [indiscernible], excluding fuel is expected to continue to improve. This is important because it demonstrates that beyond the temporary impact of fuel, we believe that the underlying business is moving [indiscernible] in the right direction, with improving cost momentum and a stronger foundation for sustainable profitability. As a result of this structural resilience, we ended the quarter with a cash position across the level reported in the third quarter of 2025. Financial debt, including leases, continue on [ LATAM ] trajectory, while we maintain our investment program without raising additional debt. Our focus remains on investing for the future while protecting liquidity and preserving the financial strength of the business. Our network -- we continue to grow through the recently announced routes launching in 2027, including Mexico City to Milan, Guadalajara to Paris, Nassau and [ Monterrey ]. This expansion reflects our confidence in the long-term demand outlook and our disciplined approach to growth, adding capacity selectively in markets where we see attractive opportunities to generate profitable returns. The U.S. Department of Transportation decision immediately revoked its prior order disapproval circle scheduled by Mexican carriers, marks a very positive development for Aeromexico. It removes an important restriction on our ability to add frequencies and launch new scheduled services between Mexico City and the United States, subject to applicable regulatory requirements. This gives us greater flexibility to capture attractive growth opportunities, strengthen our transborder network and offer our customers more connectivity between Mexico and the United States. Taking care of our customers also delivering a reliable operation, every day in every market we serve. This is something our teams have been focused on and the results are clear. Cirium once again recognized Aeromexico as the most on-time airline in the world during the third quarter. Together with our performance in the first and second quarters, this positions us very strongly to receive this [ recognition ] for the third consecutive year, a feat that no other airline has achieved in history. Building on our strong third quarter results and solid outlook, we plan to remain focused on operating reliably, protecting revenue performance, managing costs with discipline and further strengthening our balance sheet. Ricardo will provide more detail on our 4Q and full year outlook shortly. Before that, I want to highlight the positive opportunities ahead with resilient demand and a favorable fare environment supporting continuous revenue momentum. We also see full operating leverage and better in our existing fleet. At the same time, we anticipate continuing to invest electively to the customer experience and in the network that makes Aeromexico, the preferred choice for charters. We are confident that this combination of strong execution and disciplined growth and our resilient business model will continue to differentiate Aeromexico and create long-term value for our customers, employees and shareholders. With that, I will turn it over to Aaron to discuss our commercial performance in more detail. Thank you very much.

Thank you, Andres, and good morning, everyone. I want to thank the entire Aeromexico team for their hard work and dedication to our customers for their continued loyalty. As Andres mentioned, we delivered the strongest quarterly revenue performance in Aeromexico's history with total revenue of $1.62 billion, up 13.6% year-over-year. This performance reflects strong demand across the network and the benefits of the commercial initiatives we are executing. International revenue showed strength across all entities, increasing 17.4% year-over-year, led by long-haul markets in the U.S. region. Growth in the U.S. region was especially notable given the high comparison base as last year's third quarter marked the inflection point in U.S. demand recovery. In domestic, performance strengthened throughout the quarter as we distance ourselves from the World Cup, resulting in domestic revenue growing 6.7% year-over-year. Turning to commercial initiatives. Aeromexico Rewards continued to be an important driver of customer engagement and revenue quality. As Andres mentioned, program participation reached a new record in the third quarter of 40%, up 8 points year-over-year and 19 points since the program's reacquisition and rebranding in 2023. Redemption revenue grew 27% year-over-year, 2x more than total revenue growth for the quarter as investments in the program continue to bring value to customers. Regarding modern airline retailing, our redesigned branded fare structure is driving significant incremental revenue by better aligning our product offering with different customer needs and willingness to pay. This enables us to more effectively position our premium offering while expanding our ability to compete from our price-sensitive demand. These capabilities continue to support growth in our direct online channel, where in the third quarter, direct online share remained at an all-time high of 48%, up 2 points year-over-year and 23 points versus 2019. These initiatives are giving us greater control over how we present, differentiate and monetize our products, enabling more disciplined execution of our premium strategy while giving us the flexibility to compete across a broader range of customer segments. Looking ahead to the fourth quarter, Ricardo will provide details of our guidance. We continue to see strong demand trends across all geographies. In September, our fall sales campaign generated 45% more revenue than the previous year. In response to rising fuel costs, Aeromexico remains focused on deal recapture initiatives and maintaining flexibility and capacity management. Regarding capacity, fourth quarter growth will be driven primarily by wide-bodies as Aeromexico continues expanding its long-haul network in Europe and Asia enabled by recent 787 deliveries. This wide-body growth reflects a continued [indiscernible] of demand in traditionally weaker periods, particularly in European markets, and includes the extension of Monterrey Paris to year-round and the annualization of our recently launched Mexico City Barcelona service. In addition, in the fourth quarter, we plan to grow domestic capacity between 3% and 4%, enabled by the increase in Mexico City slots from 44 to 46 per hour. We expect this growth to enhance our leading domestic position at our hub. In closing, we believe Aeromexico is well positioned to deliver a strong finish to the year, supported by continued revenue momentum, growing customer engagement and a disciplined approach to growth. I'll now turn the call over to Ricardo.

Thank you, Aaron, and good morning, everyone. First, I would like to join Andres and Aaron impacting the entire Aeromexico team for its outstanding efforts and execution during the quarter. Our results reflected [indiscernible] to remain focused, responsive and discipline for navigating significant fuel volatility, foreign exchange movements and a more demanding than expected cost environment. Our results demonstrate the strength and resilience of our business model and the durable structural advantages we have been [indiscernible]. In the third quarter, total capacity measured [indiscernible] sense, increased 1% year-over-year generally in line with our guidance. We manage capacity carefully by raising profitability. International ASMs grew 3%, [ or domestically ] event declined 3%, aligning supply with demand. As Aaron mentioned, revenue reached $1.6 billion, [ 40% ] year-over-year and a record for any quarter. [indiscernible] increased 12% driven primarily by passenger revenue and cargo and other commercial initiatives. Total revenue increased by $194 million more than offsetting the $121 million year-over-year increase in fuel prices. This [indiscernible] performance was driven by resilient demand, strengthened international markets, targeted revenue management initiatives and continued growth in our premium products and reality programs. The result was particularly significant given that fuel costs were approximately $93 million above the level contemplated in the guidance provided last quarter. During the third quarter of 2026, Aeromexico based [indiscernible] program breakage, the first such alignment in 2018. To date reflects current member activity and long-term program trends. This update resulted in the recognition of $49 million in revenue for the period, together with an adjustment to our deferred liability. More importantly, this affected breakage establishes the rate bank that we expect to drive sustained growth in our annual revenue moving forward. Our revenue growth fully offset the year-over-year increase in fuel prices. The combined impact of higher fuel costs anticipated increases in other operating costs and the impact of the stronger Mexican peso continues to pressure profitability. Despite the broader cost pressures, our disciplined execution and strong revenue performance supported an EBIT margin that remains among the strongest in the industry. Total operating expenses increased 22% year-over-year, primarily due to a 58% increase in TL expense, our fuel prices averaged nearly $4 per gallon compared with [indiscernible] in the third quarter of 2025. Our efficient fleet help mitigate this impact with fuel consumption down 2% and fuel bond for [ AM ], including [indiscernible]. Excluding fuel, operating expenses increased 10%, primarily reflecting the stronger Mexican peso, inflationary pressures and costs associated with fleet growth. CASM ex fuel increased 7% year over year, the improvement over the approximately 15% increase recorded during the first half of the year. This progress reflects decal discipline, operating efficiency and a more stable foreign exchange environment. As we continue to capture operating leverage opportunities by generating more [ licenses ] with our existing assets, we expect our half next year to turn more favorable. Adjusted EBITDA amounted to $389 million, representing a strong 24% margin, while operating income reached $190 million, resulting in a robust 12% operating margin. The strength of our financial results underscore the structural durability of our business model and our ability to preserve healthy profitability despite a challenging cost environment. In our view, however, the most important financial results of the first 9 months of the year has been our strong cash flow generation. Aeromexico generated $542 million in net cash from operating activity through September 30, 2026. Enabling loss to from our planned investments are continued to reduce financial debt. During the third quarter, we repaid an additional $7 million of debt, further strengthening our balance sheet despite elevated fuel prices and other cost pressures. We ended period with $965 million in cash and cash equivalents, up $31 million year-over-year. We also renewed and upsized our revolving base facility from $200 million to $250 million, giving total liquidity to $1.2 billion, equivalent to 21% of last 12 months revenues. This decree position provides a strong foundation to continue investing in the business or preserving financial facility. Looking ahead, our updated guidance reflects a late assumptions for fuel prices, foreign exchange and inflation-related expenses. For the fourth quarter, we expect capacity to increase between 7% and 8% year-over-year. The rating leverage that began to emerge in the third quarter should become more visible in the fourth quarter and continue to build in the years ahead. We expect fourth quarter revenue growth of approximately 14% to 16%. This outlook reflects robust demand, the strength of our network and disciplined commercial execution. With the strong demand, a stronger revenue base and high limitation of our assistant fleet, we expect generate more revenue and use our existing cost base more efficiently, supporting the stronger margins over time. More importantly, we expect to achieve this without having incremental fleet or taking on additional debt to fund growth. We anticipate further cash on fuel to remain double flat year-over-year. For the fourth quarter, we expect an adjusted EBITDA margin between 19.5% and 21.5% and an operating margin between 7.5% and 9.5%. Taken together, this will take us to our full year 2026 capacity growth of approximately 2% to 3% and year-over-year revenue growth of approximately 13.5% to 14.5%. We expect full year adjusted EBITDA margin between 21.5% and 22.5% and full year operating margin between 8.5% and 9.5%. Our guidance assumes an average all [indiscernible] price of proportionately $4.5 per [ gallon ] for the fourth quarter and an exchange rate of approximately [ 18 pesos ] per pole. We cannot predict how fuel prices will moderate, but we believe they will eventually inclusion. When that happens, our ability to capture premium revenue together with our operating leverage embedded in the existing platform that we have should be able to unlock additional profitability opportunities. In the meantime, we remain focused on strengthening Aeromexico in a maturing environment. Our structural advantages and a strong cash generation should continue to report our competitive position, and we believe that the assets in Aeromexico and its competitors should continue to item in the following months. With that, we will open to call for questions -- thank you.

[Operator Instructions] Our first question is going to come from the line of Duane Pfennigwerth Worth with Evercore.

Can you just remind us, just play back for us the impacts from changes in FX. Our understanding is a modestly soft peso will lower or help your unit cost slightly lower your unit revenue, but be net neutral or maybe even a slight tailwind to margins. Can you just speak -- just remind us if we're now, say, modeling 18% or 18.5% instead of 17% how that impacts your revenue, costs and margins?

Thank you, Duane. Let me make some comments and then maybe Ricardo will dig a bit deeper. So as you know, we have a natural hedge on the currency. So basically, this movements do not affect the P&L. However, they have an impact on demand, like a second order impact were a stronger peso means stronger demand for [ Mexico ] flying abroad and the other way around. With the peso at these levels around between [ 18 and 19 ], we feel that the demand for -- to travel from Mexico abroad continues to be solid. We are in a good spot. Obviously, when the peso was -- it starts below MXN 17 per dollar. It was even stronger during the summer. But again, we see at these levels of the currency, very strong demand for Mexican struggling [ abroad ]. So a weaker peso that we are expecting versus the July guidance means lower costs in dollars and lower revenues in dollars. So even though we kept the total revenue projections in the guidance, flat versus what we were expecting in July, we see there is an impact of this weaker peso, which is equivalent to around 2 percentage points. So that's really, really important. If you consider that the expected growth in revenues for the 4Q is between 16% and 18% versus the 4Q of 2025. So it's very, very solid. And we continue to take additional steps to strengthen revenue. Aaron can we discuss that in more detail. But again, this -- the new level of jet fuel that we are seeing, for example, is relatively new is the past 3 weeks or so, we get full approaching $5 per gallon its growth. It's a new norm. We are, as Ricardo explained for the quarter, expecting a way higher jet fuel price, which means around $170 million of pressure. And we are acting. So hopefully, with these actions, plus what I adjusted for this peso effect, we can even get closer to a growth rate of around 20% in total revenues for the quarter. Again, this [ would ] to say today, but we're working on that direction. Ricardo?

Yes. Just to complement, Andres, and respond about the revenue side. Looking at the cost side, if you look at the anticipated or estimated as ex fuel for the 4Q versus the previous guidance. obviously is that cases can be better in around 2% to 3%, given also this FX impact. So yes, we have some impact on the revenue side that Andres already described. And on the cost side, we see some positive impact on past year. Go ahead. Sorry.

Yes.Just a follow-up kind of on fuel recapture initiatives. We've obviously been a difficult year in terms of needing to recapture cost of fuel. We have had a lot of success, though, and even in recent weeks, continue with the rising fuel to find regional success in passing those costs on. So our revenue guidance is in no way an indication that we feel like we've hit the end of that. In fact, with all these initiatives that have been deployed this year, we haven't seen any signs that there's any cracks in demand that maybe we've gone as far as we can. So I think implicit in our guidance is not too much more recapture for the quarter. But we do feel like as we deploy those initiatives that could be upside. SP-4 Detailed response. And then just for my follow-up, -- can you speak to competitive capacity trends that you're seeing here into the fourth quarter? It does look like the capacity picture gets a bit tighter sequentially from 3Q to 4Q domestically in Mexico. I wonder if you could speak to that as well.

Well, what we are seeing, if you look at the capacity projections for the other 2 carriers in Mexico, they are down, they have been revised down, particularly for 1 of them, which is even projecting high single-digit contraction for the first Q. So we are not anticipating the pressures on the capacity side in the domestic market. There is an increase in the loss in Mexico City are mentioned from 44 we are covering our fair share of that, and we expect other airlines to follow. We yet having seen too much activity, but it's rational to anticipate that those will be covered, and that is what partially explains our growth for the 4Q. What I want to stress, as Aaron mentioned, that this growth of between 7% and 8% that is driven by widebody flying, right? Again, those flights that we started after the 4Q of 25 that year-on-year and the plus some additional narrow-body flying, particularly in the domestic market as we catch up versus the previous actions before it's sustainable growth, it's disciplined growth. And it doesn't consider any additional flying to the U.S. because the VLT order was lifted just at the end of last week. So we are analyzing our options, and we soon will hear positive rules on network expansion to the U.S., but it will not happen this year. It will be -- if anything, it will be at the start of 2027. Duane, a few more details on that. First of all, our 7% -- 7% to 8% capacity growth, as Andres mentioned, super efficient growth, almost all driven by state Engage versus departure growth. So that's, I think, important context. And then when you look at -- just to give you some specifics on OA capacity growth for the fourth quarter, some modest growth domestically, low single digits, 3 points of growth. a little bit more on international for points, but much below our growth in the quarter. So I look at the OA industry capacity growth in the fourth quarter to be favorable.

Our next question is going to come from the line of Michael Linenberg with Deutsche Bank.

This is Shannon Doherty on for Mike. So we saw the headline come through about Volaris and [ Viva's ] expected merger approval by the end of this year. We're anticipating to see some remedies. Do you have any thoughts on what they could be and if Aeromexico would benefit from potential revenues?

Shannon, I'm sorry, we didn't hear that very well. Could you please repeat?

Yes. Just on Volaris and Viva's expected merger approval by the end of this year, and we're anticipating to see some remedies. Do you have any thoughts there? And would Aeromexico potentially benefit from remedies?

Thank you for the question. We are waiting for the decision of the authorities. As we mentioned before, -- our job is to continue strengthening our business. We continue to invest in our line to continue differentiating ourselves, our model from the to ULCCs. So that's our job. And I think, again, as I mentioned in our remarks, we have a very positive trend. We are very happy where the business is going. And so we have been obviously the contact with the authorities sharing our views. And we cannot comment if it's going to be approved or not, but certainly, -- in the past, many locations in other parts of the world when this type of lorry, they are usually come with remedies, which ran if it's approved, we do not know yet. -- and we are not now we will show and explain our position. But again, I think we are in a good spot with where we are today and going forward.

And if I may follow up, with the increase in slots from 44 to 46 per hour, -- do you think that this number increases further? I know the pre-pandemic airport is running in the low 60s. So I'm just wondering if there are any conversations about raising the slot limit further given the DOT's revocation, which would support further service to the U.S.

Yes. Again, this increase was in Yesterday, our Secretary of Transportation, we are in the unperforming this rise in Mexico City. He participated and she was that question and he did mention -- but going forward, by the end of this decade, we can expect to see a larger number of operations in Mexico going to high 40s. That was a thesis we were in line with what we are projecting.

And our next question is going to come from Guilherme Mendes with JPMorgan, your line is open.

Yes. Andres, Ricardo, Aaron. I have a follow-up on the fee recapture and demand trends. I guess the initial remarks on the strong demand environment was very clear. But just wanted to better understand the breakdown between leisure, corporate domestic and international, which segments are you seeing another performance in which segments are you seeing underperformance?