Benzinga | Jul 7, 2021 12:22PM EDT

Why This Ultra-Low Cost Airline Could Be Poised For Large Growth

An analysis of the Mexican airline industry has BofA Securities bullish on Volaris (NYSE:VLRS).

The Volaris Analyst: Murilo Freiberger initiated coverage on shares of Volaris with a Buy rating and $27 price target.

The Volaris Takeaways: Volaris was founded as an ultra-low-cost airline by the same groups that founded Spirit (NYSE:SAVE), Frontier (NASDAQ:ULCC) and Wizz (OTC:WZZZY), indicating a solid team at the helm, Freiberger said in Wednesday note.

Volaris' fleet is built for efficiency, the analyst said: its average age is 5.3 years, which reduces fuel and maintenance costs; it consists of a single type of plane, allowing for lower training costs and variation in spare parts; and finally, it consistently delivers some of the highest load factors in the industry, allowing for a greater dilution of fixed costs.

Volaris' exceptional balance sheet aided the company in gaining market share over the last year, unlike Aeromexico (OTC:GRPAQ), which filed for Chapter 11 in June, and Interjet, which has had 92% of its fleet repossessed by lessors, the analyst said.

The key driver of Volaris' customer acquisition is its ability to charge the lowest fares due to its ultra-low cost per seat, Freiberger said.

Looking at the Mexican travel industry as a whole, bus revenues are 29.5 times that of airlines, meaning conversion of 1% of bus travelers to airlines represents a 67% increase in airline revenues, the analyst said.

This high sensitivity coupled with Volaris' value proposition means room for rapid growth, Freiberger said.

Finally, Volaris has grown its top line at a 15% CAGR over the last 10 years, according to BofA.

VLRS Price Action: Shares of Volaris were up 4.64% at $21.18 at last check Wednesday.