CTTRF - Controladora Vuela Compañía de Aviación S.A.B. de C.V. (VLRS) Q3 2023 Earnings Call Transcript
2023-10-25 17:28:02 ET
Controladora Vuela Compañía de Aviación, S.A.B. de C.V. (VLRS)
Q3 2023 Earnings Conference Call
October 25, 2023, 11:00 AM ET
Company Participants
Ricardo Martinez - IR Director
Enrique Beltranena - President and CEO
Holger Blankenstein - Airline EVP
Jaime Pous - CFO
Conference Call Participants
Duane Pfennigwerth - Evercore ISI
Stephen Trent - Citi
Helane Becker - TD Cowen
Michael Linenberg - Deutsche Bank
Rogerio Araujo - Bank of America
Guilherme Mendes - JPMorgan
Bruno Amorim - Goldman Sachs
Pablo Monsivais - Barclays
Alberto Valerio - UBS
Neil Glynn - AIR Control Tower
Presentation
Operator
Good morning, everyone. Thank you for standing by. Welcome to Volaris's Third Quarter 2023 Financial Results Conference Call. All lines are in a listen-only mode. Following the company's presentation, we will open the call for your questions. Please note that we are recording this event. This event is also being broadcast live via webcast and can be accessed through the Volaris website.
At this point, I would like to turn the call over to Ricardo Martinez, Investor Relations Director. Please go ahead, Ricardo.
Ricardo Martinez
Good morning, and thank you for joining the call. With me today is our President and CEO, Enrique Beltranena; our Airline Executive Vice President, Holger Blankenstein; and our Chief Financial Officer, Jaime Pous. They will be discussing the company's quarterly results. Afterward, we will move on to your questions. Please note that this call is for investors and analysts only.
Before we begin, please remember that this call may include forward-looking statements within the meaning of applicable securities laws. Forward-looking statements are subject to several factors that could cause the company's results to differ materially from expectations as described in the company's filings with the United States SEC and Mexico's CNBV. These statements speak only as of the day they are made. And Volaris undertakes no obligation to update or modify any forward-looking statements.
As in our earnings press release, our numbers are in U.S. dollars compared to last year's quarter, unless otherwise noted.
And, with that, I will turn the call over to Enrique.
Enrique Beltranena
Thank you, Ricardo, and everyone for joining us today.
I want to begin by highlighting the quarterly results compared to last year's figures. In the third quarter, ASMs increased by 10%, total operating revenue by 8%, EBIT by 11% and EBITDAR by 18%. Before we explain in detail the third quarter results, which Holger and Jaime will present, I'll address two key topics. The first one, Pratt & Whitney GTF engines preventive accelerated inspections and the second one is Mexico City International Airport slot restructuring and FAA's Category 1 capacity ramp-up plan.
Regarding the first topic, the Pratt & Whitney preventive accelerated inspections, I want to provide a clear and comprehensive overview of our current knowledge of the situation. This issue affects not only Volaris, but 42 airlines globally, including two in Mexico. Pratt & Whitney's parent company, RTX Corporation, revealed in July and September that the problem with the powder metal in a high-pressure turbine disc will necessitate accelerated inspections of GTF engines on Airbus A320neo family.
Approximately 3,000 engines worldwide will undergo inspections from 2023 to 2026. These inspections are mandated by the FAA after a specific number of cycles depending on the engine type. Currently, the FAA has only issued the first service instruction for the initial batch of engines.
Volaris's top priority has always been and will continue to be the safety of our ambassadors and customers. Thus, we're diligently following all preventive airworthiness directives. Our current visibility of the situation is limited to the initial batch as informed by RTX to the operators. The current estimate is that, depending on the work scope, it will take roughly 250 to 300 days on average for these engines to be removed and inspected and then returned to the operator to go back into service.
RTX estimates that Pratt & Whitney will take a financial hit of about $6 billion to $7 billion, of which 80% is customer support, namely financial compensation to carriers and the remaining 20% is labor and material costs for the work scope.
We are currently negotiating with Pratt & Whitney regarding their initial financial support for Volaris's issues corresponding to this first batch of engines. We expect to reach an agreement with Pratt & Whitney in the next month and will reflect the negotiated compensation and support package on our financial statements once that agreement is in place.
While there is still work to be done to finalize this initial agreement, I must commend Pratt & Whitney for their responsiveness and their acknowledgement for the financial strain on Volaris due to the current engine issues. They have actively collaborated with us to mitigate any significant impact on our financials. Based on guidance from Pratt & Whitney, we expect there will be additional work required on the neo engine lasting into 2024 and 2025 beyond the initial preventive inspections.
While we are in discussions with Pratt & Whitney on how best to mitigate these ongoing issues and to ensure appropriate compensation and support to Volaris, we don't expect to have any clarity on the longer-term impact until first quarter of 2024. We will provide subsequent updates as appropriate.
Today, Volaris fleet comprises 126 aircraft, of which 22 A321neos and 51 A320neos may be temporarily affected. Once the initial directive was published, Volaris and Pratt immediately identified the engines requiring preventive accelerated inspections.
In September, there was an 8% reduction in ASMs and an estimated revenue impact of $18 million versus the forecast associated with our original published capacity. Thus, on October 10th, we revised our ASM growth for the full year 2023 to be 10% versus our previous guidance of approximately 13%. This translates to a fourth quarter 2023 total capacity remaining virtually flat compared to the fourth quarter of 2022.
Despite this capacity reduction in our forecast, we anticipate that our total operating revenue for the year will remain at the low end of this year's annual guidance provided in February, reaching approximately $3.2 billion.
The situation is still evolving, but we anticipate engine inspections will limit capacity deployment from the engines to be inspected until they are completed by 2026. Management is looking for alternative solutions to mitigate the impact and will consider, for example, extending leases and identifying ceo aircraft.
It is premature to forecast the potential impact on our 2024 growth plan. But notwithstanding our mitigation initiatives, it is fair to assume that we will be forced to shrink our capacity in 2024 as a result of these engine issues. As we've done in the past, the Volaris management team will again do our best to respond to the challenge. We have designed the mitigation plan to manage changing variables and generate the shareholder value.
As an ultra-low-cost carrier, we are always focused on managing costs. We control and implementing strategic initiatives to offset the impact of those we do not control. In this case, these initiatives include, first, we're optimizing our network by taking advantage of the recovery of Mexico's Cat 1 status, reducing growth to new markets and cutting capacity on underperforming routes.
Second, we are maintaining strategies to stimulate demand and enhance ancillary penetration to drive unit revenues. Third, as noted above, we are currently negotiating lease extensions for several ceo aircraft, initially scheduled for redelivery in 2024 and 2025. Fourth, we are implementing additional cost efficiency initiatives, which include reducing redelivery expenses in the short term.
Fifth, on the OEM side, we are maintaining our new Airbus aircraft deliveries for 2024 and 2025, which currently includes 24 already financed aircraft. Additionally, we are actively pursuing further tactical additions in both aircraft and engines.
RTX has stated, I quote, we are still able to deliver new engines and spare parts due to the deployment of the angle scan inspection.
Moving on to the second key point on Mexico City International Airport and Cat 1. The Mexican Aviation Authority has announced a reduction at the Mexico City Airport from 52 to 43 aircraft slots per hour effective January 8, 2024, after the holiday season ends. As a result of this adjustment, Volaris will have four aircraft lines available for redeployment to other domestic stations, primarily serving routes to the U.S. following the Cat 1 up. For 2023, our estimated EBITDAR margin is anticipated to achieve approximately 26%.
We will continue to execute diligently our mitigation plan in the short term to manage our costs around the reduced operating fleet size, while thoughtfully retaining key personnel, so that we may resume our long run growth trajectory and superior cost profile when the engine inspection situation has passed.
I will turn the call over to Holger to discuss our quarterly operating results and go-forward network strategy.
Holger Blankenstein
Thank you, Enrique, and good morning.
Let me highlight some critical aspects of Volaris's performance in the third quarter. During the quarter, our RPMs demonstrated robust growth at 9.2%, outpacing ASMs which grew at a rate of 8.2%. ASMs were aligned with our plans in July and August, while RPMs exceeded expectations.
The positive momentum in our domestic passenger base highlighted in our second quarter call through mid-July continued throughout the quarter, resulting in solid domestic volumes and load factors. Domestic ASMs finished the quarter 2.2% higher year-over-year. International ASMs increased by 22%, driven by a substantial capacity reallocation to Central America, exceeding last year's levels.
We catalyzed loads in our domestic network during the quarter, achieving outstanding load factors networkwide. Overall, we achieved a total load factor of 86.4% for the whole quarter, surpassing 85.6% recorded in the third quarter of 2022.
In July and August, the Pratt situation affected capacity by approximately 3%. However, parking the aircraft affected by the GTF engine issues in September resulted in a 1.9% decrease year-over-year in domestic ASMs, a reduction versus the original plan of 8%.
Despite strong demand in the Mexico, U.S. market, we experienced a load factor contraction of about 10 percentage points in Central America. This was mainly due to a substantial 74% year-over-year increase in capacity, a strategic move as part of our preparations for December, positioning us optimally for the upcoming high season. Notably, demand for VFR travel in the region remains robust.
In spite of the challenges posed by the initial round of GTF engine inspections, Volaris demonstrated remarkable resilience in the operational performance and a solid net promoter score throughout the third quarter. This was evident in our strong metrics, including volumes, efficient utilization, and, notably, ancillary revenue penetration. Despite a suboptimal operating environment, we delivered record quarterly aircraft utilization last quarter, a meaningful tailwind to ASM growth.
Regarding unit revenue, TRASM for the quarter came in at $8.37 cents, a 2% increase year-over-year, helped by a stronger peso. This result was driven by increased volumes and ancillary revenue per passenger, which grew by 26% year-over-year. This was partially offset by an average base fare of $48, 13% lower year-on-year as we intentionally kept stimulating demand to maintain loads.
Our ancillary strategy has delivered solid results, and we are delighted with its rapid growth. In the third quarter, ancillary revenues reached $49 per passenger, setting a new quarterly record and representing significant progress.
We are fully dedicated to emphasizing this strategy, acknowledging its crucial role in enhancing revenue and margins. During the third quarter, ancillary sales represented remarkable 50% of our total operating revenues. Notably, our V Club membership program, including the highly successful Zero Ticket Fare introduced this summer, experienced sustained growth.
Passengers with V Club memberships now constitute 18% of our total passengers, reflecting a significant increase from 8% compared to the third quarter of 2022. In addition to our understanding of bus switching passengers, we are just starting to drive the adoption of ancillary products and encourage repeat service through our loyalty-based programs.
Our affinity program with OXXO, the largest retailer in Mexico, is still in its early stages, and we envision it evolving into the largest platform in Mexico with Volaris as one of its cornerstones. Looking into the fourth quarter, we see solid bookings across our network as we approach the holiday season with demand trends largely resembling the ones we saw in the third quarter.
Regarding our network, Volaris saw two critical developments in the third quarter with Mexico's recovery of Category 1 status and Pratt & Whitney's GTF engine inspection announcement. We were pleased to announce the recovery of Category 1 status on September 14th, a significant milestone achieved over two and a half years after the initial downgrade. In the past month, we have diligently pursued regulatory authorizations to increase our flight frequencies between Mexico and the U.S.
Additionally, our culture partnership with Frontier is set to resume in December. Although the GTF engine preventative accelerated inspections have affected our ability to reallocate aircraft for U.S. bound routes, more than anticipated, we are on track to introduce four aircraft lines onto Mexico to U.S. routes by December, representing a 19% increase in capacity compared to last year's levels.
Our management team is also working to optimize our network for the parked aircraft expected in 2024 by identifying and reducing capacity along ramp-up and underperforming routes.
Looking to the next year, we will focus on prioritizing our most profitable routes. While doing so, we will maintain a prudent approach to protecting Volaris's long term growth prospects. Our commitment involves preserving our leadership in our domestic core markets, while leveraging the Category 1 upgrade for routes to the U.S. Simultaneously, we plan to scale back certain trunk routes. Specifically, we will be reducing capacity on ramp-up routes and at Mexico City International Airport in response to the aircraft movements reduction taking effect on January 8th.
I will now turn the call over to Jaime Pous to discuss the financial performance for the quarter.
Jaime Pous
Thank you, Holger.
For the third quarter of 2023, Volaris demonstrated financial performance that somewhat tracked behind our expectations. Total operating revenues came in at $848 million, a 10% increase compared to 2022, driven by sound demand across our network and ancillary revenue per passenger, which increased to $49 from $39 the previous year. However, this result was partially restrained by the impact of the preventive accelerated inspections of the GTF engines during September.
TRASM was $8.37 cents, up 2% year-over-year. EBITDAR for the quarter totaled $207 million, an 18% increase over the prior year's quarter. EBITDAR margin was 24.4% or an improvement of 1.6 percentage points from the third quarter of last year, favored by lower jet fuel prices and a stronger peso. Volaris posted an EBIT of $39 million, up 11% for an EBIT margin of 4.6%, flat versus 2022.
Our CASM ex-fuel was $4.91 cents, an increase of 21%. The primary factor driving this increase was a strong appreciation of the Mexican peso compared to the prior year. As a reminder, a stronger peso has a net positive impact on our operating margins. Still, it is a headwind for unit cost, given the translation of peso denominated cost into dollars in our consolidated P&L. The appreciation of the peso impacted our unit cost by $0.34 cents in the quarter. Excluding this effect, our CASM ex-fuel only increased 12% versus the third quarter of 2022.
We managed cost as effectively as possible to achieve expectation that included cyclical pressures associated with maintenance and redeliveries that we anticipated on our Investor Day last December.
Moving to jet fuel, the average economic fuel cost during the quarter was $3.17 per gallon. While this equates to a 20% decrease year-over-year, given the lapping of last year's historic surge in fuel prices, jet fuel costs have risen rapidly since the second quarter of this year, up 17% sequentially. Given the recent geopolitical global circumstances, we expect to continue to experience volatility in jet fuel prices.
During the quarter, we booked delivery cost accruals of $42.4 million and no sale and lease back gains. Total CASM came to $7.98 cents for the third quarter, a 1.7% increase compared to the third quarter of 2022.
For the third quarter, the net loss was $39 million. The cash flow provided by operating and financing activities in the third quarter was $145 million and $87 million, respectively. Cash outflows used in investing were $138 million. CapEx, net of predelivery payments, totaled $63 million in the quarter.
Our strategy to maintain operational and reliability drove investment of $11 million in acquiring spare engines. The capitalized measured maintenance events expenses were $37 million for the quarter. Year-to-date, CapEx net of predelivery payments stands at $186 million. For the full year, we continue to expect CapEx of $300 million, net of predelivery payments.
Volaris finished the quarter with the liquidity position of $764 million, representing 24% of the last full month's operating revenue. Given the effect of the expected parked aircraft on our capacity and network, it is particularly important to maintain a healthy cash position.
In this sense, we secure financing for ATIS spare engines through finance leases for $109 million. Notably, tied of these leases, are a structure under Japanese operating leases with call options or JOLCOs, representing a milestone for Volaris as this marks our first entry into these finance structures.
Additionally, in the third quarter, Volaris successfully issued Mexican trust notes worth MXN1.5 billion or $86 million. This marks our third offering under the program approved by the CNBV and solidifies Volaris as a regular issuer in the Mexican debt capital markets.
Overall, our balance sheet remains solid and flexible to comfortably meet our financial commitments for the foreseeable future. At the end of the third quarter, our net debt to EBITDAR ratio remained at 3.5 times.
As of September 30th, our fleet comprised 125 aircraft, up from 113 aircraft a year ago. Seats per departure were 194 in the third quarter, and our fleet had an average age of 5.6 years. We are working diligently on our fleet plan with Airbus and maintaining our regional aircraft delivery plan, which includes 24 aircraft already financed for 2024 and 2025.
Our mitigation plan encompasses adjusting certain operating cost in anticipation of the expected reduction in our fleet. However, we must emphasize that we would be cautious in scaling back our operations. While we are committed to cost control, we also focus on long term growth and are mindful of the required resources to support that future.
Additionally, we aim to retain the flexibility to increase operations after the engine inspections are completed quickly. Although our unit costs will likely experience a work pressure due to capacity reductions, our commitment to maintaining world-class cost control remains unwavering.
The company's net cost impact for the third quarter, which includes rounding compensation, is forecasted to remain under control. Consequently, for the entire year, we expect the CASM ex-fuel to stay consistent with our original guidance of around $4 point cents. CASM, both including and excluding fuel expenses, will be netted for the compensation received from Pratt & Whitney. However, it is important to note that each line in the P&L statement will continue to reflect the actual cost of the entire fleet, including the non-productive fleet.
We updated our full year 2023 guidance two weeks ago to reflect parked aircraft cancellations and higher fuel prices. As a reminder, our estimates for the full year are as follows: ASM growth of 10%, total operating revenues of $3.2 billion, CASM ex-fuel of $4.8 cents, EBITDAR margin of 26%, CapEx of $300 million net of finance predelivery payments, net debt to EBITDAR ratio of 3.5 times. This outlook assumes an average for the full year foreign exchange rate of approximately MXN17.75 per $1, an average economic field price of approximately $2.80 per gallon.
Now, I will turn the call over to Enrique for closing remarks.
Enrique Beltranena
Thank you very much, Jaime.
Volaris has managed numerous challenges and regulatory static in recent years, including slot reductions in Mexico City International Airport, a major COVID crisis, a downgrade in the category of the Mexican Aviation Authority, soaring fuel costs well above historical levels, shifts in aviation regulations, including discussions on cabotage, the transition to new airports, significant delays from OEMs, the complex implementation of new engine technologies, et cetera. The Volaris team has consistently responded with agility throughout these challenges, adapting the company effectively and achieving considerable success.
At certain moments, in the aviation industry, absolute clarity is impossible to assess. We firmly believe that the current situation is no exception. We are again prepared and motivated to manage the airline for a successful 2024.
We will focus on managing our fleet to the best of our ability, putting safety first, while focusing on profitability. Our operation may be smaller in the short term, but with continuing strong demand against reduced capacity in our markets and appropriate support from Pratt & Whitney, the next year has the potential to deliver an improved performance versus 2023.
Thank you very much for listening. Operator, please open the line for questions.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from Duane Pfennigwerth with Evercore ISI. You may proceed.
Duane Pfennigwerth
Hi, good morning. I just wanted to ask you maybe a - like a RASM distribution or a profitability distribution question. If you were to rank your routes kind of highest RASM to lowest RASM, how much lower is the bottom 10% to 15%? In other words, you haven't given 2024 guidance here, but if you were to cut the bottom 10% to 15% of your capacity into next year? How much could your RASM improve? And, certainly, appreciate there are a lot of moving parts here with Category 1, et cetera, and maybe some shift to international, but maybe you could give us a sense for some sensitivity there?
Enrique Beltranena
We had a part of those routes that were not performing yet on a profitable basis, okay, so that 10%, 15% that you have in the lower tail include a good amount of routes that were in development. If you remember, we launched more than 40 routes this year that were maturing and they were part of that, okay.
So, what we are doing is, yes, you are absolutely right on making the question, we are cutting down that capacity, we're cutting down the non-profitable capacity and the less profitable routes and that accounts - that probably improves our TRASM somehow between 5% to 8%.
Duane Pfennigwerth
Okay. Appreciate it. Yes.
Holger Blankenstein
And there are a lot of new moving parts. It is also fair to assume that there will be some capacity reductions in the Mexican domestic market, since two out of the three airlines, which account for 70% of the market, are going to be affected by the Pratt & Whitney engine issue. So, lots of moving parts in the domestic market and we have Cat 1 back in the international market. So, we will see where things turn out once we have a full plan.
Enrique Beltranena
I think, it is important to say, Duane, that our forecast for the year end already includes the downtime of the aircraft that we have forecasted for this quarter.
Duane Pfennigwerth
Okay. Thanks for those thoughts. And then just on compensation, I assume, at a minimum, aircraft ownership and the cost to make these repairs are on the table, but what about other costs? Staff cost, presumably, you hired to fly this capacity, what other forms of compensation are on the table?
Jaime Pous
Duane, at the moment, we cannot comment on that. It's something that we are under negotiations with Pratt. But Pratt has behaved rational and supportive of the company, but we will share whenever we have the possibility of doing it so.
Enrique Beltranena
I just want to remind you, Duane, that we do have a flexible labor contract based on a per-hour basis.
Duane Pfennigwerth
Okay. Thank you.
Operator
Thank you. One moment for questions. Our next question comes from Stephen Trent with Citi. You may proceed.
Stephen Trent
Good morning, everybody, and thanks for taking my question. I was just curious. I know with Category 1 restored now, you should have more U.S. bound flights. Any high-level color with respect to what proportion of your capacity is going to be Mexico to U.S. in 2024 versus what it looked like pre-pandemic with the view that maybe you're now still doing more Central America to U.S. non-stop, for example. Just sort of trying to sort out how you're going to be thinking about your northbound capacity? Thank you.
Holger Blankenstein
So, Stephen, this is Holger. I can give you some color on the fourth quarter. We are planning to increase capacity in the international markets by around 19% for the fourth quarter and that is driven by some additional U.S./Mexico capacity. As Enrique mentioned, we're considering four aircraft lines that were previously operated in the domestic market to be shifted into the international market in the fourth quarter.
And, also, to remind you that we added significant capacity to Central America, which includes Central America to the U.S. flying, and that's up in the high double digits year-over-year. So, we are focusing on growing our international capacity in the fourth quarter. For 2024, we are still sorting through the available capacity, and we'll get back to you with some additional guidance on the split between domestic and international as we move through the fourth quarter.
Stephen Trent
Appreciate that, Holger. Thank you. And just a very quick follow-up, if I may. I know the Mexican government has, I guess, resuscitated Mexicana. You know, when you look at their flight schedules, to what extent do you guys have modest overlap or maybe no overlap at all? Just trying to sort that out? Thank you.
Holger Blankenstein
So, we have reviewed initial press notes of what their planned capacity is. All of the capacity that this new airline will launch is from the new airport, AIFA, the New Mexico City airport. And there is about half of the routes are currently overlapping with U.S. from AIFA and half are completely new routes from AIFA. So, very limited overlap so far for us with the new airline.
Stephen Trent
Okay. Thanks again, Holger. I'll leave it there. I appreciate that, guys.
Holger Blankenstein
It would be 1% to 2% ASM overlap, right now.
Stephen Trent
Perfect. Very helpful. Thanks very much.
Operator
Thank you. One moment for questions. Our next question comes from Helane Becker with TD Cowen. You may proceed.
Helane Becker
Thanks very much. Hi, everybody, and thank you for the time today. Earlier this week or late last week, it was reported by the three publicly traded airports in Mexico that they had reached an agreement on charges with the government. And the government put out a note that said airfare should come down 9% to 12% as a result of that agreement on charges. And I'm wondering if that - how that will affect you guys, if at all?
Jaime Pous
So, Helane, we've been tracking the process with the airport groups very closely, and all I can say firm today, that it is firm today is we've received a letter that was sent by GAP to the DGAC or to the Authority, where they are proposing a reduction of 10% of two hours effective that same day, okay. So that may impact the total price of the tickets to the consumers.
Helane Becker
Right. That's what I'm wondering if that will affect you, so then the one-word answer is, yes, it will.
Jaime Pous
Yes, it will, on a positive basis.
Helane Becker
Because your costs are going down, but won't you have to reduce your ticket prices to the customer?
Jaime Pous
We're not affected by any of their changes.
Helane Becker
Okay.
Jaime Pous
Our pricing structure is not being affected by any of their changes.
Enrique Beltranena
The two-hour charge, the pass-through charge that we put into the ticket price, so the total ticket price for the consumer that they pay on our website is going to be reduced, but not our actual fare or ancillary revenue.
Helane Becker
Got it. Okay. Got it. I understand what you're saying now. Thank you. And then just on V Club members, I heard you say that, I think, membership doubled in the past one year, which is very impressive. Is there a limit as to how many members you're willing to accept into the program, or is it kind of an unlimited number?
Holger Blankenstein
No, Helane. We don't have a limit on how many V Club members we would like to welcome to our program. Ideally, the more members we have, the more captive audience we have and the more repeat business we have. So, we highly welcome this development.
Helane Becker
Okay. Thank you. Thank you very much.
Operator
Thank you. One moment for questions. Our next question comes from Michael Linenberg with Deutsche Bank. You may proceed.
Michael Linenberg
Hi, good morning, everyone. I guess, out of your fleet of 125 airplanes, how many Airbuses are now grounded? And as you think out over the next 12 months or so, do you have sort of a rough sense of how many airplanes will be on the ground at any point in time?
Enrique Beltranena
Yes. As I said, Michael, we have 52 neo engine aircrafts. So, which is kind of half of the fleet, okay. And given that this is now a revision every certain number of cycles, 2,800 cycles for the A321s and 3,800 cycles for the A320s, most of those aircrafts will go through the revision, through the preventive revision.
Michael Linenberg
Okay. And how many are on the ground? How many do you - or maybe none are grounded, maybe?
Enrique Beltranena
Today, we have 16 aircraft grounded.
Michael Linenberg
Okay. And does that number - Enrique, as we move to the next 12 months or so, does that number gets better or is that kind of a rough guide?
Enrique Beltranena
It depends on every week, okay. That's why it's so important. I mean, I think, Michael, what we're trying to do is we're thinking on our customers and we have to publish an itinerary and a schedule, which is solid and it's reliable and it's not changing for the customers. That's why on the other side, I mean, for us, it's really important to speak in terms of ASMs, because we'll have aircrafts going in, aircrafts going out, engines going up, engines going down, and it's going to be really variable.
So, I don't think it's - it's important to speak about aircrafts or engines for you guys who make your prognosis based on ASMs and for the customers who need a reliable schedule. So, I think the most important way of managing this is managing through a prognosis based on ASMs.
Michael Linenberg
Okay. Okay. I agree. I just - I'm trying to get the sense on knowing that we cover the lessors, I'm trying to get a sense of how many airplanes you may have to extend the leases on, and that's actually my second question, which is, in your conversations with the lessors, what sort of response are you getting on the cost of the new lease? Because what we're hearing is that with narrow bodies scares and everybody asking for extensions at the same time and interest cost very high, that in some cases the response they're getting from the lessors is a much higher monthly rental price under the extension than what they were currently benefiting from, despite the fact that the airplane is a lot older, right? It should be a lower lease rate, not a higher lease rate. So, that would be my second question, is just on your early conversations with the lessors, if it - does it appear that these new extensions would be a bit more expensive than what you currently have? Thanks for taking my question.
Jaime Pous
You're welcome, Michael, this is Jaime.
Michael Linenberg
Hi, Jaime.
Jaime Pous
In types of numbers, we will be extending 18 aircraft that were supposed to be redelivery in 2024 and 2025.
Michael Linenberg
Okay.
Jaime Pous
The new rent environment has changed due to the situation. Still, rents will be lower than the neo fleet that we have. Extensions will range between 24 months to 48 months. Normally, lessors prefer that the airline that is already operating, the plane - extends the plane rather to give it to someone new, because they don't need to accrue any expenses in fitting the airplane for the other airline. But you are right, the pricing environment has increased if you compare from early this year to today.
Michael Linenberg
Great. That's super helpful. Thanks. Thanks, everyone.
Operator
Thank you. One moment for questions. Our next question comes from Rogerio Araujo with Bank of America. You may proceed.
Rogerio Araujo
Hi, gentlemen. Thanks for the opportunity. I have a couple here. The first one on the new margin guidance provided. It's - it simply implies a very strong EBITDAR margin for 4Q, despite the higher oil price, around 33%, 34%. Is that correct? And what is driving that? I can do the other following that answer. Thank you.
Holger Blankenstein
So, I'll take the first part of that question. Thank you for that. And so, in the fourth quarter, we are expecting a high single digit year-on-year growth in total revenue per available seat mile, and we believe that those improvements will mostly come through better ancillary revenues following the same trend of improvements that we have observed year to date.
And I remind everyone that we are entering the - one of the best quarters of the year with the high season of December and November. In there, we're also leveraging the return of Cat 1 in December. And we will grow in the U.S. Mexico market as we already explained. And I remind everybody that the guidance that we've given already includes the affected aircraft through the Pratt & Whitney engine situation. So that capacity guidance we talked about already includes that number.
Rogerio Araujo
Okay. That's very clear. Thank you. My second question is regarding the financial compensation. So, you guys mentioned $6 billion to $7 billion in financial compensation, estimated 80% coming to compensate the airlines and 3,000 engines. So, can we do likely - if you do an average compensation by engine, do we reach something that is close to a best guess. And is it going to be a similar compensation for each engine of all these 3,000, or it's going to be very different across airlines?
Enrique Beltranena
I think, that's a question you need to do to RTX. I cannot answer for RTX and how they negotiate their compensation packages. I can tell you what we're trying to negotiate and how we are trying to negotiate it.
And it's - the problem I have is, I have a limitation from the contractual perspective to mention the number. That's what we're planning to do. And I think this is really important - is effective before the end of this quarter, we will release a forecast both of the ASMs that we'll be flying in the following quarter and second an amount - a total amount that will be accounted as part of the quarter compensation.
Rogerio Araujo
Okay. Very clear. Thank you very much. Have a great one.
Operator
Thank you. One moment for questions. Our next question comes from Guilherme Mendes with JPMorgan. You may proceed.
Guilherme Mendes
Hello, everybody, and thanks for taking my question. I have two follow ups. Actually, the first one is on international capacity. So, following Cat 1 and removing and have you been facing some kind of competition from U.S. carriers by adding more capacity to the U.S. Because we understand that over the Cat 2 situation, most of the - of the most profitable routes were compensated by U.S. carriers? And the second one, also related to capacity is that by removing the capacity from Mexico City airport, if you are adding some additional flights from AIFA or you're just removing your overall exposure to Mexico City? Thank you.
Holger Blankenstein
So, in terms of the U.S. capacity, I can tell you that our airline focuses on a different market segment than many of the U.S. carriers. We are focused on our VFR core markets flying from the center of Mexico to some of the Mexican heritage population markets in the U.S. that have no direct service, while many of the U.S. carriers focus on leisure destinations in Mexico.
And I would also like to remind everyone that we're seeing an increasing CASM gap between us here in Mexico and our U.S. peers. So, we believe we're well positioned to take advantage of additional demand in the U.S./Mexico transporter market.
Regarding the capacity in the Mexico City metro area, we are currently operating in three airports and we are reducing capacity in Mexico City International Airport. And, as Enrique mentioned, we're using that capacity to fortify our U.S./Mexico capacity in the short term. Away from Mexico City in other markets from Mexico City - from Mexico to the U.S., maybe I can just add that.
Guilherme Mendes
Okay. Super clear. Thank you.
Operator
Thank you. One moment for questions. Our next question comes from Bruno Amorim with Goldman Sachs. You may proceed.
Bruno Amorim
Thank you. So, I have two questions. First one, it's a follow-up on the guidance for margin. As previously discussed, the guidance implies on a significant improvement in the fourth quarter. Is this guidance including any potential benefit from compensations to be received from RTX, or is it net of those effects? I'm just trying to understand, try to extend the margin delivery in fourth quarter could be a good proxy for the future?
And the second question is a clarification on the engines that have already been grounded. What type of feedback are you receiving from RTX in terms of the duration of this process? How many days will they need to go through the whole inspection process? Thank you.
Jaime Pous
Hi. This is Jaime. I will answer the first question. Yes, it has the benefit of the compensation of Pratt & Whitney, the guidance for the 4Q. You will see in two lines as mentioned in the call on the other operating income line and on the maintenance expenses line.
Enrique Beltranena
I think on the second part of your question, this is Enrique Beltranena, RTX stated yesterday in their call that they are still thinking about 250 to 300 days of duration for the total turnaround times for the engines.
Bruno Amorim
Okay. Thank you.
Operator
I'm sorry. Thank you. One moment for our next question. Our next question comes from Pablo Monsivais with Barclays. You may proceed.
Pablo Monsivais
Hi, guys. Thanks for taking my question. I have a quick one on the - on basically - I would like to have more color on your ability to source new aircraft in the first half of next year? How do you think that that is happening and the likelihood of you having some extra aircraft in the lease market? Thank you.
Jaime Pous
Thank you, Pablo. First, we have our own purchase order with Airbus. We will be receiving 11 aircrafts in 2024 and 13 aircrafts in 2025. So, we already have that contractual expectation to receive those aircrafts. In addition, we already secured extensions for the 2024 pre-release aircraft to be redelivered and we are looking at other aircraft.
What we want to do, Pablo, is we don't want to fix a short-term problem and create a long-term problem. So, we are really doing analysis aircraft by aircraft on a P&L basis before we decide to bring a few aircrafts to try to mitigate the DPS impact. But we have been really thinking about long term success and short-term profitability.
Pablo Monsivais
Perfect. Thank you.
Operator
Thank you. One moment for questions. Our next question comes from Alberto Valerio with UBS. You may proceed.
Alberto Valerio
Hi. Thank you for taking my questions. So, I would like to follow up on the Mexican and the Aviacion. We see ticket fare very low at this moment. For some routes, even 50% discount. I know that for a while the overlap is small, they start to see very few aircraft at this moment, but do you see any potential liability on privilege for the airline and then you can cover legal dispute, or do you think that they'll be restricted to that 10 aircraft that they have initial planned for the city and keep that at a small portion of the market? Thank you.
Enrique Beltranena
I mean, again, we need to say that Volaris has advocated for fair competition with equal conditions for all market participants. We have demanded equal treatment from the Authorities and are closely monitoring the implementation process for any new entrants. The good news is this last week, the FAA Authority or the Aviation Authority have made it really clear that they were not going to allow the new airline to have better benefits.
And that's the way they have stated it. It is important also to say that they started selling, but then they interrupted, and their tickets are now on sale [technical difficulty] then remind you guys, I mean with equal - with fair competition, Volaris has always been a very good carrier competing with any other competitors since we were founded.
Alberto Valerio
No doubt. Very clear. Just one more question on my side, about Tulum airport, is there any news on the Tulum? They already started selling tickets on that airport. Will Volaris make any deal with this airport? Thank you.
Enrique Beltranena
As I stated it in the last call, we are absolutely interested in Tulum and we may fly from Tulum. It's in its final phase of being constructed and finished. And once we have clarity on safety and the way we can fly there, then we will start acting our structure and announcing capacity. But I think for us it's really important to have absolute clarity on how we fly and how we approach, how we take off and the way we operate, since safety is always the first thing for us.
Alberto Valerio
Okay. Thank you very much, everyone.
Enrique Beltranena
I think, it is important for you guys also to understand. We are now the only public company in this country, okay, not only airline public company. As a result of that, we cannot publish capacity that it is not approved by the Authority or that it is not legally with Authority to reply the routes.
Operator
Thank you. One moment for our next question. Our next question comes from Neil Glynn with AIR Control Tower. You may proceed.
Neil Glynn
Good morning, everybody. If I could ask two questions. The first one following up on some of the U.S. commentary, I'm conscious there's a lot of capacity from each of the three Mexican airlines hitting the market over the next few months. And I'm interested in your take as to the ability of that capacity to hit the ground running so to speak, or how do you think about the lag to maturity of some of those routes.
Then the second question, you've mentioned your first foray into the JOLCO market. Your sister company, Wizz Air in Europe, has been using that market for quite some time. So, I'm interested in terms of why now for that - for the JOLCO market? And should JOLCO's play a bigger role for you in the future? Thank you.
Jaime Pous
I will start first with the second question, Neil. This is Jaime. Basically, in the past we hadn't explored the JOLCO Japanese market. We did a first trip during the month of May and visit the banks and some of the players. And this is the first approach. We are dealing with engines, which is a smaller risk for an exposure for the LatAm area. Some of the Japanese investors were concerned about the LatAm market in particular due to Chapter 11 and breaches under their prior contracts from some Latin American airlines.
So, I think, it's good news that we were able, in such a short term after the visit, to being able to execute a transaction on engines. We already have the sale and leaseback for most of the planes of 2024 and 2025. We do have some sales at the end of 2025. That it will be interesting if we can accommodate a JOLCO transaction. It is probably the cheapest money due to the tax benefit, the Japanese, would they have accelerated their possession.
So, it's good. It was helpful for us that they knew with some of the banks and investors, but we are really optimistic on the view that the Japanese investor had on the story of Volaris and where we are heading. On the first question, the line was cut, so we couldn't hear it. If you can repeat it, please?
Neil Glynn
Sure. It was really a question about how long it takes some of this new capacity into the U.S. to perform as your existing U.S. network, given clearly there's disparate routes being introduced, but there are three of - three Mexican airlines introducing a lot of new capacity at around the same time?
Holger Blankenstein
So, regarding the U.S. capacity, I can tell you that international new routes typically have a longer ramp up time than domestic routes. However, we are not introducing any new routes. We are adding capacity to existing markets that we already operate and that require more capacity, because we're seeing extremely high loads in those markets. So, the ramp up time of those increased frequency is significantly lower. And we are going to be focusing on our Mexican heritage core market, which is very different to the U.S. carriers, as I already mentioned.
Neil Glynn
Many thanks.
Operator
Thank you. Excuse me, this concludes today's question-and-answer session. I would like to invite Mr. Beltranena to proceed with his closing remarks. Please go ahead, sir.
Enrique Beltranena
Thank you very much. So, before I end the call, I want to specially thank our ambassadors who have been working hard again to optimize our operations in light of these engine inspections and changing schedules and changing reservations and accommodating to the new environment.
As always, I want to thank our Board of Directors, investors, bankers, lessors, and suppliers for their unwavering commitment and support. But let me tell you something, I remain really positive of the way we can manage this situation. And I look forward to addressing you all again in the next future.
Thank you very much. Thank you, operator. Thank you, everybody.
Operator
Thank you. This concludes the Volaris conference call for today. Thank you very much for your participation, and have a nice day.
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Controladora Vuela Compañía de Aviación, S.A.B. de C.V. (VLRS) Q3 2023 Earnings Call Transcript