与 Antipodes 的 Phillip Namara 梳理 Volaris 投资逻辑

With me today, I’m happy to have Phillip Namara from Antipodes. You’re still the Greek from Antipodes, Phillip Namara? How’s it going?

I’m good. Thanks, Andrew. Thanks for having me on.

I’m super excited to have you on. I’ll tell you, the stock we’re going to talk about today brought back a couple of old war wounds for me.

The company we want to talk about is Volaris. The ticker is VLRS, and it trades domestically in the United States, but this is a Mexican airline. I’m really glad you brought it to my attention because it’s a fascinating company. What is Volaris, and why is it so interesting?

Great. Thanks again, Andrew. Volaris is a Mexican low-cost carrier. They fly a fleet of Airbus NEOs, and 55% of their airline capacity is dedicated to the Mexican domestic market. The rest is mostly U.S. transborder traffic.

They’re owned by a private equity firm that owns a bunch of other low-cost airlines globally. Volaris came onto my radar because, at Antipodes, we tend to start with longer-life, industry-based research.

The way we think about value is through a relative assessment. What’s happening with the industry, and what’s happening with the company relative to that industry or subsector? We look for multiple ways of winning.

In this particular situation with Volaris, there are multiple ways of winning. We’ll invest in everything from low-growth to high-growth companies, from no earnings to coal companies, and at very, very low multiples. This stock checks a lot of our boxes.

Maybe the best way to start, Andrew, is to talk about airlines, because I think you mentioned you’ve got a history with them.

Before we get there, let me jump in with one quick thing. What you were talking about—looking at more, I don’t want to say asset-based, but more things in the real world, and throwing coal companies into the mix—is funny because I think I leaned that way, too. The market has been beating that out of me a little bit over the past 3 years.

If you had stuck with it, the past 6 weeks would probably have felt pretty good. Of course, 6 weeks doesn’t make a trend, but we’re recording on February 17, and everything you said—even investing in coal companies—has been rewarded. It’s not like the days of the Russia-Ukraine invasion in early 2022, when all of them were moving, but hard assets have really been rewarded.

I keep thinking about something somebody said 10 years ago: “Bytes are easy. Atoms are hard.” The stock market is starting to incorporate the idea that bytes are really competitive and atoms are hard. I guess I’m just saying that I don’t know if you feel the same way or if I’m extrapolating, but it does feel like, over the past 6 weeks, the market has said that what Phillip and Antipodes are pitching—hard assets and longer-life industries—is where the puck is going for a lot of these things.

I acknowledge what you’ve said. Since the end of November, it feels like there’s been a crazy rerating of basically any old-world stock, and a lot of them are running further than the fundamentals would suggest.

At the end of the day, when it comes to our philosophy, it’s about what the value is. We can find value in some of those companies. I imagine you’re talking about the software stocks that have blown up recently. I think there’s value across the spectrum, so we’re not biased toward old-world versus new-world or capital-light businesses.

There’s a right price to pay for everything based on future growth and resilience. It’s certainly true that, 3 years ago, people would say coal companies had zero value to their terminal value.

Today, people are saying that the software companies being bid up to the stratosphere have a questionable terminal value. I think that’s right. AI is improving exponentially in these companies.

Coal companies may still have no terminal value, but they’re starting to be awarded a lot more of one. Cement is one area I’ve looked at and found interesting. I haven’t pulled the trigger on anything, but you know cement will be there 20 years from now and 200 years from now. We’re going to be using cement to make a lot of things, and that’s getting rewarded with a premium multiple.

Thank you for rambling with me. I’d love to get into Volaris. The past year, especially, has been really interesting for the company. Please take the story from the starting point wherever you want to go. I’ve got two and a half pages of notes and questions, so there’s no way we’ll get through them all, but I’m ready to talk about it.

Wow, okay. You want me to start specifically with Volaris?

I feel like you wanted to start with airlines. Please feel free to start there, because I recognize that a lot of your listeners are probably U.S.-based and therefore, rightfully so, think airlines are a crappy business.

It’s a bad industry. The nature of the business is very difficult, and historically it has had very low returns on capital and been a value destroyer, for a few reasons. The first is that you have a very long capital-outlay timeline.

So you order the fleet 5 to 10 years before you even enter into operations, and then you sell a commodity with zero marginal cost. The cost to sell, or to fill, an additional seat on the plane is zero. So in periods of bad demand, fares can drop dramatically. Specifically for the US, part of why it’s been a pretty rough industry is also that I think regulators have allowed pretty minimal consolidation or attrition, which has led to more pronounced periods of overcapacity.

When I think about what creates some of the drivers of high returns over time and a sustained high return—for example, Southwest prior to 2017 and even Ryanair—I think there are 2 key drivers. The first is whether you have a competitive advantage with respect to your network. Typically, that comes from scale, so you’re able to offer a higher-density network. Consumers can pick between flights; if they miss their flight, they can take that same flight again in 2 or 3 hours’ time. You can offer more destinations, and this all comes with scale, which gives you a better ability to offer a better schedule for consumers.

Secondly, there are cost advantages. Southwest and Ryanair are perfect examples. If you’re in the business of selling a commodity, it’s better to be the low-cost player. Then maybe the third driver of a high return is related to that long capital outlay timeline.

When there are periods of really strong demand that outstrip supply growth—which I think you saw in the US between 2010 and 2016—that’s when you can see strong pricing. But this is a cyclical industry, so the players that are profitable will ramp up their fleet orders, extrapolating the profit today forward. All of a sudden, you’re left with a relative overcapacity situation, which can take years to unwind.

Can I pause you there and ask a couple of quick questions just on the industry overall? You mentioned Ryanair and Southwest, and I think those are interesting because Southwest, for a long time, was a great stock. Now maybe Southwest has gone so far beyond that because it basically evolved into one of the big airlines. The stock has pretty much stalled out from 2015 to today. It’s basically a flat stock over the past 10 or 11 years.

A lot of things happened—obviously COVID and everything—but I don’t think anybody would say Southwest has created a lot of value recently. That would apply again. I might have a domestic focus, but I look at Frontier and Spirit, and I’ve got a lot of war wounds from Spirit. None of these guys have created any value. Many of them have gone bankrupt: Spirit has had multiple bankruptcies, and Frontier is probably circling the drain.

Ryanair has been a killer, but I look at that and I don’t have the same international focus you do. I look at that and say, Warren Buffett’s old thing was, before I invest in an airline, remind me to call 1-800-Airlines Anonymous or something. Is Ryanair the exception that proves the rule? Are there other low-cost airlines globally that are creating actual value?

Yeah. I’ll point to Volaris, but you’ve sort of helped me. Maybe I’ll explain why the US has been a bit of an—

It’s fantastic, because obviously the Mexican structure is different from the European structure, and it might just be something my US and domestic brain can’t handle. So please, yes, that would be great.

Exactly. Look, I think it’s a function of consolidation, and I think the most important driver of airline profitability over time is relative market share. In the US, you have the legacy carriers—the Big 3—which account for roughly 65% to 70% of domestic capacity. During the period after 2008, when order-book growth across the industry was very low, you saw the low-cost carriers, like Spirit and Frontier, become really profitable. Oil went from $100 a barrel down to $40, and they had planned their fleet growth around $100 per barrel.

They were really effective at capturing spill traffic. That refers to potential passengers who are turned away or rejected because a flight is fully booked. The legacy carriers’ flights were fully booked. But I think the key thing that changed in this industry, beyond the rampant capacity additions from those point-to-point players, is that basic economy really changed things in the US.

The legacy carriers—I think it started with Delta—made significant investments over multiple years in their products: premium seats, airport lounges, real estate, new terminals, concourses, and technology. Their scale, combined with loyalty, has helped them segment fares in a way such that they can price-discriminate and no longer spill traffic to the low-cost carriers or the point-to-point players.

I’ll give you a very specific example. Let’s say you’re flying from Atlanta to Orlando. Atlanta is United’s hub, and about 12% or 13% of its capacity is there. It’s the largest airline there by quite a bit. In the pre-COVID, pre-basic-economy world, there was ample demand and its planes were full. But now, after a lot more planes have entered the market and a lot more narrow-bodies have entered the market, United reserves—I think on its calls, it says—about 15% to 20% of its seats for basic economy.

What that means is that it will offer a rock-bottom fare, like $100 a ticket, to price-match the low-cost carriers. The rest of the plane is premium seating, whereby many of the passengers are relatively price-insensitive because, first, they know that if they miss this flight, they can always get the next United flight in 2 hours. Second, they’re probably paying for the flight with loyalty points, or they know their credit cards let them pay for it. They do the math: “Oh, yeah, I’m only paying $100 as opposed to $200.”

Business travelers are very price-insensitive.

Exactly. And so all of a sudden, if you add up 20 percentage points of capacity across the Big 3, which account for 70% of domestic capacity, you now have 14 percentage points of extremely low-cost seats. For context, Frontier is about 3% of US capacity, and Spirit was about 3% of US capacity. Allegiant, Sun Country, and JetBlue—if you sum them up, they’re almost equivalent in size to the amount of this dirt-cheap capacity that’s been added to the market.

In my view, that’s a pretty brutal competitive strategy that the legacy carriers have been able to enact. That’s what’s killed Spirit and is killing Frontier today.

Let me move from the domestic market to general markets more broadly, and I think this will help us bring us to Volaris, because there are other questions here. I think what happened, if I could sum it up from my point of view, is that in the US, you had these huge scale advantages. Eventually, those scale advantages copied the basic-economy model—the Spirit and Frontier model—and basically put them out of business.

They found ways to discriminate, and again, they’ve got huge scale advantages, credit-card advantages, operating advantages, slot advantages, and all sorts of other things. In Europe, Ryanair—I’m not as familiar with the European market—has all these things that Spirit and Frontier try to copy in the US. But Ryanair has basically been able to stay one step ahead of all the legacy, probably slower European airlines.

I think Europe is much more fragmented, especially with the short international hops, and Ryanair has had a lot of success with that. I guess if I was coming to Volaris and Mexico, maybe we could dive into that. When I look at them, especially after this merger, which we definitely need to talk about, they’re pretty big.

My question is: They’re not the biggest, and they’re coming at this with a low-cost model, but can that really succeed? Are they in a weird spot? I don’t quite know where I’m going with this, but I’d love to hear your thoughts.

So, no. I mean, you’ve touched on a key point: In Europe, the legacy carriers don’t have as high a relative market share. Also, I think what’s really helpful is that there are lots and lots of lower-cost airports. On the second-quarter call last year, United’s CEO basically mentioned that, to fly into New York—I forget which particular airport it is—the airport landing fee per passenger is $47, and JetBlue was charging $70.

So, how are they ever going to be profitable, right? Whereas in Europe, there are 3 airports in each city. Ryanair can move into one of those airports and say, “We’re going to triple the passenger volume here, but you’re going to charge us $10 per passenger in landing fees.” And the airports comply.

That scale advantage, plus access to secondary, second-tier, low-cost airports, is very helpful. And, yeah, I don’t think the legacy or full-service carriers in Europe are anywhere near as sophisticated as those in the US. Therefore, the rapid growth of Ryanair and its relative scale have tipped things in its favor, such that it has been able to continue winning over there. Now, maybe then, to move on to Mexico.

Yes. The Mexican airline industry, I think, is probably one of the best structural stories. This business—this industry—looked a bit like the US in maybe 2006. It was basically a duopoly between Mexicana and Aeroméxico, with 2 full-service carriers, similar to your Delta and American. Overnight, you had 4 low-cost carriers launch within 12 months, and there were too many seats.

What followed was basically a fare war, whereby the airline industry went from 13 players all the way down to 4 by 2019. Just crazy, crazy wars. Everyone was ordering new jets, and when you get a new jet—especially if it’s the next generation of jet—your cost per seat is 15% or 20% lower than your next peer. So, you had a pretty brutal price war.

During that time, the market, in terms of demand, grew from 25 million passengers all the way to 70 million in 2019. Most of that growth—the structural growth in this market—actually comes from taking share from buses. In Mexico, you have 3 billion passengers annually who travel for several hours on these long-range buses, and they’re paying $50 to $100 for a trip. On a dollar-per-hour-of-travel basis, flying is actually really, really cheap.

But I guess the issue, and why those 3 billion haven’t converted to passengers immediately, is that it requires a mindset shift—or behavioral shift, actually.

Oh no, if I can, you’re hitting on the slide that I have. This is from a merger we’re going to talk about. There’s a merger presentation from December; it’s slide 9. What really jumped out to me is exactly what you’re saying.

They describe the story with buses, and buses are the biggest competitor. They say other things, too, like there are people who have never flown before, and going to the airport is a big barrier for them. But they have this slide where they say a lot of the competition they have is buses.

If you look at Mexican GDP and how many flights the average person is taking per year, and compare it to all sorts of emerging markets, the one they specifically call out is Turkey. Turkey has about the same GDP as Mexico, and people are taking 1.3 trips per year, whereas in Mexico they’re taking 0.5 airline trips per year.

Mexico is surprisingly big. I didn’t realize this. I think from the bottom of Mexico to the top is like the bottom of Florida to somewhere in Canada. So, they’re saying, “Hey, if you just get that, the Mexican market is 130% bigger overnight.”

Obviously, there are a lot of stats, and I’m sure they play with them a little bit, but one of the things I really liked is exactly what you’re saying: you’ve got these airlines, probably a lot of fixed capacity, and a huge tailwind for organic growth here.

Yeah, exactly. Over the years, when I’ve spoken to them, they said they would literally have their salespeople standing at the bus service terminals, offering people—if it was going to be their first flight ever—a free first flight if they decided to come and fly with Volaris.

It’s a really big natural demand tailwind. Their traffic is mostly driven by first-time flyers and then visiting family and relatives, which means it’s a little less price-sensitive compared to leisure travel. That’s the backdrop: demand grows 7 or 8 points a year.

The actual market itself—I stopped at 2019 because I think that’s a notable period. In 2019, there were only 4 left, right? The big 3 accounted for 76% of domestic capacity. In 2019, the number-4 player, Interjet, was sort of a bit of a hybrid model.

They weren’t a low-cost carrier in that their planes were not the newest A320s or 737s. They were flying these old Russian jets. But in the back end of 2019, they went into bankruptcy. I think their management team were getting chased by Interpol, and when they came out of the market, immediately in that second half of the year, you could see fares take a step change higher.

So, if I’m going to summarize the pitch right now, I think the pitch is: today, there are only 3 players, and with this merger we’re going to go to a 2-player market. I anticipate you will see another step change up in fares.

So, let’s talk about the merger. In December—and I want to ask you a lot of things about this merger—Volaris and Viva Aerobus, I believe is the company, announced what amounts to a merger of equals, right? I think shareholders own 50/50%. Volaris is a little bigger and more indebted, but whatever. It’s a merger of equals.

The stock’s flying higher for all the reasons you’re talking about. First, merging 2 airlines together generally has huge synergies. Interestingly, they emphasize on the call that these 2 airlines are going to operate completely separately, but they’re going to merge the 2. There are going to be synergies, and it takes a competitor out of the market, I guess, even though they’re going to operate them differently.

But I want to stop there. We can talk about the merger thing, but I do want to ask: how much of your investment here is about the investment opportunity versus how much is it about, “Hey, this merger, if it goes through, consolidates the market, turns it into an oligopoly, takes a competitor out, all the synergies—everything”?

People can go pull up the chart, right? The stock is a screamer since they announced the merger in December. I think the stock’s 40% higher. So, the market is clearly loving what this merger does, and I think there’s other stuff, too. But the market is clearly loving the merger, and we’ll probably get into antitrust and all this sort of stuff.

I don’t know. It’s not a sure thing this merger happens. So, merger versus just the standalone opportunity?

Yep. We’ve been shareholders and have been following the story since maybe 2020 or 2022. At today’s price, maybe to back into your question, I sort of think the probability of merger success that’s being priced into the stock—given that I think the stock standalone is worth $10 a share today, and I think if the merger is to go through, I think it’s a $20 to $25 stock—is actually reasonably low. Therefore, it’s great value.

Let me ask on value. As you and I are talking, the stock is $10 per share on the US exchanges. Again, it just changed to VLRS. I think standalone this is trading at—and you can correct me if I’m wrong, because my numbers are much rougher; you live this, I looked at it for half a day—standalone, I’ve got it at about 8 times earnings; post-merger, 7 times.

If you ignore the synergies—synergies are pretty big here—I think it’s about 5 times with the synergies. If I just looked at the stock market, Delta trades at about 10 times forward earnings. Southwest trades at about 12 times forward earnings. Those are obviously very different businesses; we’re talking domestic airlines.

But if you came to me and said, “Hey, Andrew, domestic airlines are trading at 10 to 12 times earnings. I want to pitch you an emerging-market Mexican airline that’s trading at 7 to 8 times earnings,” I’d probably rather be in the domestic airlines, to be honest with you.

So, if I just threw that out, how do you think about fair value here? Again, we’ve laid out that there’s a really attractive backdrop and all that, but I want to push back a little bit on that valuation and standalone value argument.

Yeah, sure. Well, look, on my numbers today, the way I think about this is on an EVA basis. At a $12 stock, you’re trading at basically 3.5 times standalone NTM earnings, or next-12-month earnings. That’s very, very cheap—about 1 standard deviation cheap versus history for Volaris, just as a standalone business.

Then, qualitatively, to think about it, I think the comparison with US low-cost carriers just doesn’t make sense, right? This is a 3-player market. This market is growing at 7 points a year, steady state.

The actual competition—the nature of competition—in Mexico is so rational. It is an airline analyst’s dream, in that you have Aeroméxico, which I believe is partially owned by Delta.

So, it’s a full-service carrier, but only 20% of its capacity flies domestically in Mexico. Their unit costs, I believe, are about 10 cents, whereas Volaris’ unit costs are 4.5 cents. It’s just a totally different business, right? This is a premium business, so the capacity isn’t like for like.

Beyond Aeroméxico, you have Viva Aerobus, which is just a smaller version of Volaris. Their hubs are at different locations. They’re mostly Mexican domestic flying, but they have basically the exact same fleet. The degree of competition between these two airlines isn’t as cutthroat as what you see in the US, where Frontier puts in a new route into Atlanta and then United the next day responds by putting in 3 new flights in Denver.

Can I ask you why not? That is the one thing that jumped out to me. You’ve got this growing Mexican market—a great backdrop. The thing that jumped out to me is that in the US, one of the reasons the legacy—sorry, not the legacy, the low-cost carriers—ran into trouble is that lots of other low-cost carriers popped up. It wasn’t just Frontier and Spirit; then all of a sudden you had Sun Country, Allegiant, and all these others pop up.

In this Mexican market, with these great domestic tailwinds, you’ve kind of only got 2 low-cost players. It feels like, why don’t you, if you’re starting to see all these returns and you’re starting to see this very rational pricing structure, see Mexican entrepreneurs or US LCC veterans, kind of the same way that Spirit and Frontier came, go over to Mexico and start these? That’s your argument, right? You’ve got great supply, but tons of people could flood into this market.

Yep. I think the first reason comes back to that relative market share comment that I made. At the end of the day, you and I—we go and start an airline, we try and lease 10 planes to fly from Mexico City to Cancun or something. Volaris and Viva, because they are such a large proportion of the domestic capacity today, are just going to put flights at the same schedules or time slots as us and sell tickets for $30. Within 6 months, you and I are bankrupt.

Yeah, no, it makes total sense. I guess I was wondering: in the US, there are certain airports that have really constricted flight slots, and the airlines that have them—I was wondering if Mexico had something like, “Hey, you know, Tijuana has really constricted flight slots, and they’re all locked up by the big 3.” So even if you and I wanted to, Tijuana is a big flight place, and we couldn’t even get a flight slot or something.

To my understanding, the only airport that’s capacity-constrained in Mexico is Mexico City International Airport. That’s the only one. I think something like 60% to 70% of Aeroméxico’s capacity originates or departs from that particular airport. Everywhere else is fair game.

You mentioned you and I started an airline, and I’m in. Let’s do it. I’ve lost money in stupider ways before than starting an airline, so let’s go start an airline. We’ll make a documentary about it.

One fair question I’d like to ask every guest—and I’d love to get your thought on this—is: the market is a competitive place. What are you seeing that the market is missing? I’d like to tag onto that question: you’re coming—we’re recording this internationally. You’re in Australia; I’m in New York City. What are you seeing that the market is missing, but why are we seeing from outside the borders what the people inside the borders kind of aren’t seeing? I always ask this on foreign sucks.

Why are we seeing that? I think, actually, inside the borders people are seeing this. Part of the reason why it trades cheaply, or at a lower relative valuation to the US players, is, number 1, liquidity. If this stock were more liquid, then basically anyone who covers airlines would be long. I’ve spoken to other investors who want to own the stock, but they can’t own it because it isn’t liquid enough for them.

The reasons to own it—the structural reasons around competition, relative market share, and demand growth—I think they’re pretty obvious.

Does the merger help with that? It’s a 50-50 merger. They’re merging with a private company, but eventually those shares come online, right? Right now, it trades around $5 million a day, which I think is decently good. Do you imagine that, over time, the float could really increase as legacy holders of the private business start selling off?

That’s my hope, absolutely. In terms of the merger, beyond just the consolidation, I think from a strategic point of view it’s great. Indigo Partners, which owns 18% of the Volaris stock today, is a private equity firm founded by Bill Franke, who arguably you could say is the godfather of the low-cost carrier model.

What they do is pull together their airline orders with Airbus to get bulk pricing, and hence you get a cost advantage on the aircraft itself. On the other side of the transaction, at Viva, the owner of that business also owns the largest Mexican bus conglomerate. It’s not just a second business; it’s probably the ultimate customer-acquisition funnel for the airline.

When the 2 come together, you benefit from a lower purchase price for your actual fleet, and you’re able to amortize that better customer-acquisition cost across 2 types of passengers.

Let me go to regulatory issues. You mentioned this is a pretty concentrated market already, and you’ve got 2 players who are arguably the biggest competitors merging together. When I read the merger call, a lot of it seemed to be talking to regulators about why they should approve this.

Number 1 would be, “Hey, we’re not even going to merge these brands together. The consumer won’t even know there’s a difference. They’re going to compete with each other.” When I see Paramount and HBO with Netflix, with Netflix coming out and saying, “We would never merge HBO and Netflix together,” that is talking to regulators. When I look at the merger deck, they’re talking about how many jobs are going to be created and everything. It seems like they’re really targeting the regulators.

Why would regulators allow the number 2 and 3 players to merge together here?

Yeah. I remember when the merger was announced, I was talking to someone at the firm, and I said, “This is just incredibly brazen.” On every metric, if this were to be judged by the DOJ, it would fail.

Maybe not under this administration, but certainly the last one.

That is true. The degree of consolidation here and the degree of route overlap are pretty punchy, or eye-watering, actually.

I think the arguments would be that it’s probably the logical conclusion of a global trend of consolidation in airline markets to improve profitability. Ireland, Australia, Canada, India, Chile, and even now recently South Korea basically have an airline that has maybe 60% or more of domestic capacity.

I think the pitch that Volaris and Viva will be making to the regulator is that they’re able to lower costs, and therefore it makes them more comfortable investing and accelerating their fleet growth, such that they can make low-cost flying more accessible to the hundreds of millions—or billions—of potential passengers who are still flying on buses.

I think they would also say that more passengers travel to and from Mexico into the US through the Big 4 carriers than through any of the Mexican airlines, even combined. There’s probably a pitch to protect the sovereignty of the skies. That would be a national-interest argument.

Of course, they’ve talked about accelerating fleet growth. Forty percent of Volaris’ routes only compete with buses. They’ve shown how they’re able to maintain very low base fares to stimulate demand, and I think that’s a great point that the regulators will hopefully take into account. Cost reduction will help them keep prices lower.

Another one—and this is classic AMLO—is that the former president of Mexico, AMLO, was obsessed with building a new airport called Felipe Ángeles, or AIFA. It’s in Mexico City, but much farther away from the larger, core Mexico City airport, and the airport is run by the military.

The actual flight capacity coming out of this new airport is very low because it adds maybe 1.5 to 2 hours to get into the core of Mexico City from that airport.

And so, to support this huge infrastructure buildout, the government actually relaunched its own state-owned airline, called Mexicana, and it was framed as a pro-competitive move. Eighteen months later, their losses are, I think, maybe a negative 60% EBITDA margin, and they only have 5 planes. So I think what the pro forma entity, Volaris and Viva, can do is play into that sort of ambition by redirecting a bunch of their capacity from Mexico City. Mexico City is slot-constrained, so they can give up their slots there and move a lot of their capacity; then the government can tout this huge project as a win.

Just chef’s kiss—no notes. Just incredible stuff from the government, starting its own airline and everything.

No, I’m just looking at this. It’s crazy. Domestically, you forget about some of this stuff, or you don’t think about it. I’m looking at Volaris’s website, and you can pay by credit card, but they also offer the option to pay with cash at Walmart and one of the local big convenience stores, 7-Eleven, and OXXO. It’s crazy. They’ve got Mexico City to Guadalajara for $7 for a flight. You forget that there are a lot of different things that haven’t been developed in emerging markets along these sorts of lines.

One quick question. You said you started off as a generalist. I think you’re a lot more specialized in airlines than you give yourself credit for, because this has been a master class in airlines across the globe. When I was reading their call—I can’t remember if it was a merger call or an earnings call—they talked about grounded planes. From the top of my head, they had 157 planes, and I think they said 37 of them were grounded. So that’s over 20% of the fleet. Again, I’m not an airline expert, but over 20% of the fleet grounded sounds like crisis levels to me. They were kind of talking about it as par for the course: “Hey, hopefully we get a little better.” What’s going on with the grounded fleet here?

Yeah. As a shareholder in the stock, when that was first announced, it was pretty painful. Basically, what’s happened is that Pratt & Whitney had an issue with its engines.

Oh, okay. I remember this from the Spirit thing. So it’s the jet issues that Pratt & Whitney was having, and Pratt & Whitney is probably going to need to pay a pretty penny. I thought it was their maintenance, not Pratt & Whitney engines. If you want to explain it, please—I don’t want to leave listeners wondering, but I completely know what you’re talking about now.

Okay, great. Pratt & Whitney is an engine manufacturer selling into the Airbus A320 and A321 programs. They had this powdered-metal issue within their engines. Basically, one-third of the global fleet of these A320s has been grounded since mid-2023.

That is actually just incredible, right? All of a sudden, you’ve got a third of your fleet grounded, but you’re still paying leases on them on a monthly basis. The way the companies were reimbursed by Pratt & Whitney was through maintenance credits, which they would report as a negative operating expense. It wasn’t actually a cash credit, but it meant that when your engines needed to go in for their next shop visit for maintenance, you didn’t have to pay any cash up front. I think that hit the stock in, call it, mid-2023, and it’s absolutely weighed on the stock.

Just to talk numbers, these guys pay roughly $350,000 per month per aircraft in lease expense, and the Pratt & Whitney compensation they’ve been receiving is, call it, $200,000 per month. So the compensation they’ve received has actually been far less than what they’re paying just in the fixed cost of the planes. That doesn’t even take into account the fact that this company has also been hoarding labor. The initial view was that this would all be solved within 2 years, but 2 years later it still hasn’t been fully solved. They still have the same proportion of the fleet on the ground, unfortunately, but they’ve been hoarding labor, so they’re paying that extra fixed operating expense as well. They’ve been penalized from a cash-flow perspective over the last 2 years and, therefore, I think they’ve been dramatically under-earning.

They’re expected to have their full fleet back and flying by the end of 2027. They’ve adjusted their fleet-delivery plan with Airbus such that they’ve extended out the deliveries that were supposed to come next year and through 2030. Rather than getting a new plane, they’re just going to grow as their aircraft on the ground are returned to the air.

Just in rough numbers, in 2023 and mid-2024, they were earning, on my numbers and without taking into account the credits, something like $700,000 per month in EBITDA per plane, and that was with their full fleet flying. Today, they’re earning $700,000—I think a little more—per plane per month, but that’s with one-third of their fleet grounded. So maybe you can shave EBITDA per month per plane down a little bit, given that with more capacity entering the market, fares should come down a little bit. But that’s growth from, call it, 110 planes to 150 planes that you’re going to get over the coming 2 years, just by itself. Viva was equally impacted because they have basically an identical fleet, and the same proportion of their fleet was also affected by this.

Luckily, these guys didn’t suffer significant market-share loss, because the worst-case scenario is that you’re flying a Pratt & Whitney fleet, your competitor is flying a Boeing 737 fleet, one-third of your planes are grounded, and they have all this free market share and get pricing as well.

It’s one of the reasons I can’t believe what Pratt & Whitney offered. I haven’t followed this in a while, but it was a big thing with the Spirit merger back in the day. On the plane issues, what about the largest Mexican airline, Aeroméxico? Are they having issues here too? Because it is interesting: if you’ve got 20% of the supply taken out for everyone, then everyone is actually going to be much more profitable, right? If it’s only one player, as you said, all the other players have a field day. But if it’s for everyone, I’m curious: if the largest player is having 20% taken out too, you’re going to have a lot of supply coming online at one point. But if the largest player is only on Boeing, so they didn’t have any of their fleet grounded, then it’s like, “Oh, cool, the 2 smallest players get 20% more.” They’re really going to do well there.

Yeah. Aeroméxico flies a Boeing fleet, so they were not impacted by it. But again, they don’t actually compete with Volaris and Viva. Only 20% of their fleet flies domestically in Mexico, and the rest is Mexico to Europe, Mexico to wherever else—international destinations. If you have wide-bodies in your aircraft, you can do international; that’s really, really profitable business, as we’re seeing with the U.S. guys.

So, yes, they benefited in their Mexican business, which is probably 1/5 of their operations, from a base-fare perspective, but it wasn’t an outsized gain because, again, the capacity isn’t like-for-like.

That’s perfect. Phil, we’re coming up toward the end of an hour. I’ve learned a lot here, not just on this but overall from talking about the international airline landscape. I do want to ask: any last questions or anything we should leave listeners thinking about here? There’s more?

Can I just talk about what I think it could be worth?

Yeah, that’d be great.

I think I referenced earlier that in 2019, when Interjet collapsed and this went from a 4-player market to a 3-player market, you saw base fares lift by about $8 per passenger, and that’s even with oil coming off. So it’s true pricing power.

If you see a similar increase in EBITDA per passenger and factor in a little bit of synergies—typical merger synergies in the airline industry are 3% to 6% of revenues—if you put the midpoint there, and I think this stock is at about $2.50 of pro forma EPS, global low-cost carrier share winners trade at 8 to 10 times. So I think it’s a $20 to $25 stock.

The downside, if the deal fails and the people who were involved in this stock for the merger flush out, is that I think, at worst, it trades back to around $7 or $8.

If they don’t do the merger, right—let’s say this merger is, as I worry, and I think you’ve probably got it right, politically flavored—if this merger doesn’t go through, what’s the plan for stand-alone at that point?

The same as it was prior to the merger. They’ve already pushed back or deferred those new deliveries, so they’ll just grow into their total fleet.

The share gain should be split 50/50 between Viva and Volaris based on their contracted order book growth. Really, 50% of their growth tends to come from thickening existing routes—that is, adding flights to where they're already flying—and the rest comes from new routes. So it's not super-competitive capacity additions.

Perfect. Well, Phil, this has been really great. I've really enjoyed learning about both airlines and this individual one with you. Where can people find more about Antipodes, and reach out to you, if they want to?

Yeah, thanks. You can go to antipodespartners.com. We're a Sydney-based global fund manager with long-only and long-short products. We manage about $13 billion in funds, and I specifically work for the global small- and mid-cap strategy.

If you go to antipodespartners.com, there should be a global SMID product there that you can see. We recently launched the fund on the ASX, so if you're interested in following what we get up to, you can subscribe to our newsletter for our insights.

No, that's great. And you are correct. I'm looking at the website, and I see the Antipodes Global Shares Active ETF. That's really cool.

Phil, this has been awesome. If you can hang on for one second, I want to talk to you about one thing after the recording stops. But Phil Namara from Antipodes, this has been awesome. Thanks so much for coming on.

Thanks for having me.