Flying through the Volaris thesis with Antipodes' Phillip Namara

Summary

• Phillip Namara of Antipodes pitches Volaris (VLRS), a Mexican low-cost Airbus NEO carrier, as a mispriced merger option: 55% of its capacity is Mexican domestic, with most of the rest U.S. transborder. He puts the standalone business at about $10 a share and a completed merger with Viva Aerobus at $20–25, so the implied probability of closing is “actually reasonably low.” On his numbers, at $12 the stock trades around 3.5x standalone next-twelve-months earnings, one standard deviation cheap to its history; if the deal fails and merger money flushes out, he thinks it could trade back to around $7–8.
• Mexico is “one of the best structural stories” in airlines: a fare war took the industry from 13 players to four by 2019 while demand grew from 25M to 70M passengers, and the real competitor is buses — 3 billion annual bus passengers taking multi-hour trips for $50–100. Turkey, at similar GDP, flies 1.3 trips per capita versus Mexico’s 0.5; the merger presentation argues the market could be 130% bigger if riders convert. Volaris has reportedly stationed salespeople at bus terminals offering free first flights.
• The December Volaris–Viva merger of equals would take a three-player market to two, and the precedent is Interjet’s 2019 collapse, when base fares stepped up about $8 per passenger even as oil fell — “true pricing power.” A similar lift plus typical airline synergies of 3–6% of revenue gets about $2.50 of pro forma EPS; global low-cost-carrier share winners trade at 8–10 times, hence $20–25.
• Regulatory approval is the swing factor, and Phil is disarmingly candid: “on every metric, if this were to be judged by the DOJ, it would fail.” The pitch to Mexico is global consolidation precedent, 40% of Volaris routes competing only with buses, U.S. Big Four carriers moving more Mexico–U.S. passengers than all Mexican airlines combined (“sovereignty of the skies”), and the combined entity shifting capacity to AMLO’s low-capacity, military-run AIFA airport so the government can tout the project as a win. Phil estimated state-owned Mexicana’s EBITDA margin at maybe negative 60% after 18 months.
• The Pratt & Whitney powdered-metal groundings have masked two years of under-earning: the issue has grounded roughly one-third of the relevant global A320-family fleet since mid-2023; Andrew cited 37 of about 157 Volaris planes as grounded, while Phil described roughly one-third of Volaris’s fleet as grounded. Volaris pays about $350k/month per aircraft in leases against only about $200k of non-cash P&W maintenance credits, plus hoarded labor. Yet EBITDA per flying plane still runs about $700k/month — roughly matching full-fleet 2023 levels — and full restoration by end-2027 could take the fleet from about 110 to 150 aircraft, with Airbus deliveries extended out through 2030.
• Why doesn’t rational Mexican pricing invite entrants? Relative market share: a startup leasing 10 planes would see Volaris and Viva match its schedule at $30 tickets — “within six months you and I are bankrupt.” Aeroméxico, which Phil believes is partially owned by Delta, is not like-for-like competition: only about 20% of its capacity is domestic, with roughly 10-cent unit costs versus Volaris’s 4.5 cents. The discount to U.S. comps is partly liquidity: Andrew cited about $5M/day of turnover, but Phil says some investors who want the stock still cannot own it because it is not liquid enough.
• The U.S. ULCC graveyard is not the template for Mexico: legacies’ basic economy — reserving 15–20% of seats at rock-bottom ~$100 fares — created about 14 points of dirt-cheap capacity across carriers controlling about 70% of the market, versus Frontier’s ~3% share. That “pretty brutal competitive strategy” is “what’s killed Spirit and is killing Frontier today”; Europe instead offers Ryanair cheap secondary airports and less sophisticated full-service rivals.

Deep dive

1. Antipodes’ lens — and why airlines usually destroy value

• Volaris is a Mexican low-cost carrier flying Airbus NEOs; 55% of its capacity is Mexican domestic and most of the remainder is U.S. transborder. Phil described it as owned by a private-equity firm with other global low-cost airlines. Antipodes starts with “longer-life, industry-based research,” assesses value relatively, and looks for “multiple ways of winning” — from low- to high-growth companies and no-earnings businesses to “even coal companies.” Volaris “checks a lot of our boxes.” Andrew’s opening riff: the market has spent six weeks rerating hard assets (“bytes are easy, atoms are hard”); Phil’s caveat — many old-world stocks are “running further than the fundamentals would suggest,” and “there’s a right price to pay for everything.”
• Why the industry is structurally bad, per Phil: you order fleet 5–10 years before operating, then “you sell a commodity with zero marginal cost,” so fares collapse in weak demand; U.S. regulators allowed “pretty minimal consolidation or attrition,” producing pronounced overcapacity cycles.
• The exceptions (Southwest pre-2017, Ryanair) share two drivers: network density from scale — more destinations and more frequent backup flights — and being the low-cost seller of a commodity. A third driver is periods when demand outstrips supply, until profitable players over-order and the excess “can take years to unwind.”

2. Basic economy killed the U.S. ULCCs; Europe kept its escape valves

• Phil’s mechanism: post-2008 low industry order books plus oil falling from $100 to $40 let Spirit and Frontier capture “spill traffic” — passengers turned away from fully booked legacy flights. Then legacies, starting with Delta, invested for years in premium product, lounges, terminals and technology until scale and loyalty let them segment fares and stop spilling.
• Phil’s example framed Atlanta as United’s hub, with roughly 12–13% of United’s capacity there; he said United reserves 15–20% of seats for basic economy at rock-bottom ~$100 fares to price-match ULCCs, while much of the rest is premium seating occupied by relatively price-insensitive or points-paying flyers. Sum it: 20 points across carriers with 70% of domestic capacity is 14 points of “extremely low-cost seats” — Frontier is ~3% of U.S. capacity, Spirit was ~3%. “That’s what’s killed Spirit and is killing Frontier today.”
• Europe differs on both counts: legacies lack relative share and are “just not as sophisticated,” while secondary airports abound. Phil recalled, without specifying the airport, United’s CEO saying on a second-quarter call that a New York landing fee was $47 per passenger while JetBlue was charging $70. By contrast, Ryanair can offer to triple an airport’s volume for $10 per passenger, and “the airports comply.”

3. Mexico: from fare war to bus-conversion tailwind

• The history: the market looked perhaps like the U.S. in 2006, with Mexicana and Aeroméxico in a duopoly; four low-cost carriers launched within 12 months, triggering a brutal fare war that shrank 13 players to four by 2019 — while demand grew from 25 million to 70 million passengers, with the top three at 76% of domestic capacity.
• The structural demand story: 3 billion passengers annually take long-range buses at $50–100 a trip, so flying is cheap per hour of travel — but conversion “requires a mindset shift” or behavioral shift. Volaris has reportedly had salespeople standing at bus terminals offering a free first flight; traffic skews toward first-time flyers and family visits, making it a little less price-sensitive than leisure travel, with demand growing 7–8 points a year.
• Andrew’s corroboration from slide nine of the merger deck: Turkey at similar GDP takes 1.3 trips per capita versus Mexico’s 0.5 — the deck’s claim is that Mexico could be “130% bigger overnight” on conversion — and Mexico is longer than he realized, roughly from the bottom of Florida to somewhere in Canada. Interjet’s late-2019 bankruptcy (Phil thought its management was being chased by Interpol) produced an immediate step-change in fares — the template for three players going to two.

4. The Viva merger — and Andrew’s valuation pushback

• Andrew described the December announcement as a 50/50 merger of equals between Volaris and Viva Aerobus, with the two airlines expected to operate completely separately; he estimated the stock was about 40% higher after the announcement. Phil’s asymmetry: about $10 standalone value, $20–25 if it closes, with the implied deal probability “reasonably low and therefore it’s great value.” Antipodes has followed the story since maybe 2020 or 2022.
• Andrew’s pushback, worth keeping: his rough math has VLRS at 8x standalone earnings, 7x post-merger, and about 5x with synergies, versus Delta at about 10x and Southwest at about 12x forward earnings — “I’d probably rather be in the domestic airlines, to be honest with you.”
• Phil’s rebuttal: the U.S. comparison “just doesn’t make sense.” This is a three-player market growing seven points a year where competition is “so rational it is like an airline analyst’s dream” — no U.S.-style tit-for-tat where Frontier adds an Atlanta route and United retaliates with three Denver flights the next day.

5. Why the oligopoly holds: barriers, owners, and the liquidity discount

• Aeroméxico isn’t like-for-like capacity: Phil believes it is partially owned by Delta, only about 20% of its capacity flies domestically, and its unit costs are roughly 10 cents versus Volaris’s 4.5 — “a totally different business.” Viva Aerobus is “just a smaller version of Volaris” with different hubs and basically the same fleet.
• Andrew’s challenge — why don’t U.S. ULCC veterans or Mexican entrepreneurs flood in? Phil’s answer is relative market share: “you and I go and start an airline… Volaris and Viva are just going to put flights at the same time slots and sell tickets for $30, and within six months you and I are bankrupt.” Only Mexico City’s airport is capacity-constrained; Phil estimated that 60–70% of Aeroméxico’s capacity originates there. Everywhere else is fair game.
• On why it’s cheap, Phil rejects an information edge — “inside the borders people are seeing this” — and says liquidity is part of the reason: Andrew cited roughly $5M/day of turnover, yet Phil says investors who want the stock still “can’t own it” because it is not liquid enough. His hope is the merger increases the float as legacy private-business holders sell. Bonus structure: Indigo Partners owns 18% of Volaris; Bill Franke is “arguably the godfather of the low-cost carrier model,” and Indigo pools Airbus orders for bulk pricing. Viva’s owner also owns Mexico’s largest bus conglomerate — “probably the ultimate customer-acquisition funnel for the airline.”

6. Regulatory risk: “incredibly brazen” — but there’s a pitch

• When the merger was announced, Phil said, “This is just incredibly brazen… on every metric, if this were to be judged by the DOJ, it would fail.” Andrew’s aside: “maybe not under this administration, but certainly the last one.” The route overlap is “pretty punchy or eye-watering, actually.”
• The affirmative case: it is “the logical conclusion of a global trend” — Ireland, Australia, Canada, India, Chile and, more recently, South Korea each have an airline with maybe 60% or more of domestic capacity; lower costs let the combined airline accelerate fleet growth for bus flyers; 40% of Volaris routes compete only with buses; and the Big Four U.S. carriers move more Mexico–U.S. passengers than all Mexican airlines combined — a “sovereignty of the skies” national-interest argument.
• The “classic AMLO” angle: AMLO’s Felipe Ángeles airport (AIFA) — military-run and 1.5–2 hours from central Mexico City, with very low flight capacity — prompted the government to relaunch state-owned Mexicana as a “pro-competitive move.” Eighteen months later, Phil estimated its EBITDA margin at maybe negative 60%, with five planes. The pro forma entity can give up Mexico City slots and redirect capacity to AIFA so the government touts the project as a win. Andrew: “chef’s kiss, no notes.”

7. P&W groundings: masked earnings, embedded growth, and the downside case

• Andrew’s alarm — 37 of ~157 planes grounded “sounds like crisis levels to me” — gets reframed: Pratt & Whitney’s powdered-metal engine issue has grounded roughly one-third of the relevant global A320-family fleet since mid-2023. The economics: ~$350k/month per aircraft in lease expense against ~$200k of P&W compensation delivered as non-cash maintenance credits, plus hoarded labor — the company has been “penalized from a cash-flow perspective… and therefore dramatically under-earning.”
• Phil said Volaris earned ~$700k of EBITDA per plane per month in 2023–mid-2024 with a full fleet, and about $700k or a little more today with roughly one-third of its fleet grounded. Full fleet restoration is expected by end-2027; Airbus deliveries have been extended out, including deliveries due next year and through 2030. That implies growth from ~110 to ~150 aircraft over the coming two years before additional aircraft arrive. Viva was equally impacted, so no share was lost to a Boeing-flying rival; Boeing-fleet Aeroméxico wasn’t hit but doesn’t compete like-for-like.
• Phil’s closing math: an Interjet-style ~$8 fare lift, synergies at the midpoint of the typical 3–6% of revenue, and ~$2.50 pro forma EPS at the 8–10x multiple of global low-cost-carrier “share winners” = $20–25. If the deal dies: the pre-merger plan stands — grow into the existing fleet, with share gains split 50/50 between Viva and Volaris based on contracted order-book growth; roughly 50% of growth comes from “thickening existing routes,” and the rest from new routes.