Yet Another Value Podcast - Flying through the Volaris thesis with Antipodes' Phillip Namara

Episode Date: February 20, 2026

Phil Namara of Antipodes discusses Volaris (VLRS), a Mexican low-cost airline with significant domestic exposure and cross-border routes into the U.S. Phil outlines the structural growth opportunity in Mexico’s aviation market, where air travel continues taking share from long-distance buses. The discussion examines industry consolidation, competitive dynamics, grounded aircraft from Pratt & Whitney engine issues, and the proposed merger between Volaris and Viva. They analyze regulatory considerations, potential synergies, and valuation scenarios, framing the investment debate around both standalone fundamentals and merger upside.__________________________________________________[00:00:00] Introduction to Volaris and thesis[00:03:37] Volaris business overview[00:08:42] Airline industry economics explained[00:12:58] U.S. basic economy impact[00:19:08] European vs U.S. competition[00:22:44] Mexico aviation growth story[00:25:54] Volaris and Viva merger[00:31:07] Competitive barriers in Mexico[00:37:21] Regulatory approval considerations[00:42:41] Pratt & Whitney engine grounding[00:48:59] Merger valuation upside[00:50:05] Downside if deal failsLinks:Yet Another Value Blog - https://www.yetanothervalueblog.com See our legal disclaimer here: https://www.yetanothervalueblog.com/p/legal-and-disclaimerProduction and editing by The Podcast Consultant - https://thepodcastconsultant.com/

You're about to listen to Yet Another Value podcast with your host, me, Andrew Walker. Today's podcast is a little bit of a different one. I've got Phil Namara on from Antipodes. Antipodes is a really, really big Australian-focused globally T.F. And the reason I said a little bit of a different one is because we're going out to Mexico. We're talking about Valaris. The ticker there is VLR. Let me make sure I got that right while I'm...

Yes, VLRS is the ticker there. This is a low-cost Mexican airline that has, as you're going to hear, just a bunch of different angles to them. Domestic tail 1, gross story, capacity constrained, interesting merger that, regulatory, who knows, who doesn't know? I don't know, but just a lot of different angles. And the really good news is Phil starts off the podcast

by saying he's a journalist, but you're going to hear, and I'll tell him during the podcast, he has done a lot of work, and he's very knowledgeable on the airline sector across the board. So I think if I'm going to pat myself on the bat, I think I come in with a bunch of interesting questions. And if I'm going to pat him on the back even harder, I think he answers them all really well.

So I think you're going to learn a lot about the low-cost airline industry in general and the business model and opportunity at Valeris as well. And, you know, it's an interesting one. I wish we could have gone for an hour longer, but I had to go pick up my daughter from daycare. So we had to cut it off. We're going to get there. Disclaim remind everyone, nothing on this podcast is investing advice. This is a domestically listed, but international emerging market stock.

So keep all that in mind. See the full disclaimer at the end of the podcast. We're going to hop into the podcast in one second, but first a word from our sponsors. Today's podcast is sponsored by Fiscal.A.I. Fiscal.A.I. is a modern data terminal built for investors who want an institutional-grade platform without the complexity. Whether you're an individual investor or professional portfolio manager, fiscal.a.I gives you instant access to years of financials, earnings transcripts, and company-specific segment and KPI databases, all in one intuitive platform. What makes it stand out from other platforms? Speed, depth, and ease of use. Their data updates within

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Anyway, use my link, fiscal.a.i slash yav. That's fiscal.a. slash YAV for two weeks free plus 15% off any of their paid plans. That's fiscal.a.ai slash YAB. All right. Hello and welcome to yet another value podcast. I'm your host, Andrew Walker. With me today, I'm happy to have on from the Antipides, right? Yeah, that's it.

From Antipides. Phil Nomara. Phil, how's it going? I'm good. I'm good. Thanks, Andrew. Thanks for having me on. I'm super excited to have you on.

Really excited. I will tell you the stock we're going to talk about today. brought back a couple of old war wounds for me. But look, before we get there, quick disclaimer, remind everybody, nothing on this podcast is investing advice. You know, see the full disclaimer at the end of the podcast. That's probably particularly true today just because we're going, we're going international, we're going to Mexico, emerging market, airlines, all sorts of of high and risk. So please do your own diligence, not investing advice. Anyway, Phil, the company we want to talk about, I'm really glad you brought them to mine

because it is really interesting. It's Valores, the ticker, it trades in the U.S. domestically, VLRS, but this is a Mexican airline, and I'll stop spilling all the details. I'll just toss it over to you. What is Valeris and why are they so interesting? Yeah, great. Thanks for Dan, Andrew. So Valeris is a Mexican low-cost carrier. They fly a fleet of Airbus Neos, and they do majority, maybe 55% of their airline capacities dedicated to them, Mexican domestic market, and then the rest is U.S. transborder mostly. And that's a bit of a summary of the business, and they're owned by a private equity firm that owns a bunch of other low-cost airlines globally.

And I guess it sort of came upon my radar, given the sort of antipities, we tend to start with, you know, longer life industry-based sort of research. And so the way we sort of think about value is we try to think about it in terms of a relative assessment. So, you know, what's happening with the industry, what's happening with a company relative to that industry or subsector? And we sort of look for multiple ways of winning. And I think in this particular situation with the Valaris, there are multiple ways of winning. So, you know, we'll invest in sort of, you know, low growth to high growth, no earnings to. you know, I guess even coal companies are very, very low multiples. And this stock sort of checks

a lot of our, a lot of our boxes. And so, look, maybe the best way to start about this, Andrews, just to talk about like airlines. I think you sort of mentioned you've got a history with airlines. Yeah, before we get there, if you'll just let me jump in with one quiffy thing, you know, would you talk about kind of looking at more, I don't want to say asset base, but you know, you through coal companies, more things in the real world, that sort of stuff. It's so funny because I think I leaned that way too, though it was kind of starting to get beaten out in me a little bit by the market over the past three years for just like every. And it's so funny, you know, if you stuck with it, the past, now who knows, six weeks does not

make a trend, but you and I are recording February 17th and like everything. You said, well, even invest in coal companies. I mean, coal companies, it's not the days of the Ukraine, Russia invasion early 2002 when all in which moon, but anything hard assets, anything there, they really have been rewarded. And I keep thinking like, you know, 10 years ago, somebody said, hey, bites are easy. It's atoms that are hard. The stock market is starting to incorporate, like, bites are really competitive and atoms are hard. So I guess I was just saying, you know, I don't know if you feel the same way, if you think I'm just extrapolated, but it does feel like the past six weeks,

the market has kind of said, hey, what feel in, Antipides are pitching these harder assets, these longer-based, longer-life industries, is kind of where the puck is going for a lot of these things. So just a general rant before we hop into the call. Please feel free to you. We can go straight to Lars. You can comment on any of that, whatever you want to do. Yeah.

I mean, like I acknowledge what you've said. Like, absolutely the last, maybe since, like, the end of November, it feels like there's just been a, like, a crazy rewriting of basically any, like, old-world stock. And a lot of them, I think, are also running, I guess, further than the fundamentals would suggest. But I think at the end of the day, when it comes to maybe like our philosophy, it's sort of, you know, what's the value is. I mean, we can find value in some of those. I imagine you're talking about the software stocks that have sort of, you know, blown up recently. I think there's value across the spectrum.

So we're not like, you know, biased to a certain, call it old world versus new world. to, you know, capital-like businesses. I think there's just a right price to pay for everything based on, you know, future growth and resilience. Yeah. No, it's certainly true. It's just like, it's just interesting to me where, you know, three years ago, I think people were saying, you said coal companies.

There's zero value to terminal value to coal companies. And today, people are saying, hey, these software companies that people are bidding to the stratosphere really questioning. the terminal value. And I think rightly so, right? AI is improving exponentially in these. And the coal companies, hey, maybe they still have no terminal value, but they're starting to award a lot more of a terminal value, like especially cement's one I've really looked at and been interested in. And I haven't pulled the trigger or anything. But, you know, you know cement will be there 20 years from now, 200 years from now. Like, you can feel

pretty good. We're going to be using cement to make a lot of things. And like, that's getting rewarded to premium multiple. Anyway, thank you for rambling with me. I'd love to go. The last, especially year, has been really interesting for Valar. please take the story from the starting point wherever you want to go and I've got you see me looking over here I've got literally two and a half pages of notes and questions so there's no way we'll get them all but

I am ready to talk about it oh wow okay so you want me to talk specifically about Valeris to start I wanted to start with the airlines please feel free to start with the airlines I love talking about because I recognize you know I think a lot of your listeners are probably US

based and so they you know rightfully So I think airlines, what a crappy business. You know, it's a bad industry, right? As in the industry, I guess just the nature of the business is very difficult. Historically being very low return on capital and a value destroyer for a few reasons, right? I think the first is, you know, you have a very long capital outlay timeline. So, you know, you order the fleet, you know, five to 10 years before you even enter into operations.

And then you sell a commodity with zero marginal cost. as in, you know, the cost to sell or to fill an additional seat on the plane is zero. So in, you know, periods of, like, bad demand, fears can drop dramatically. And I think, you know, specifically for the US, part of why it's been a pretty, pretty rough industry is also that I think the regulators have also allowed, like, pretty minimal consolidation or attrition, which has led to more pronounced sort of periods of, like, overcapacity. But when I think about what sort of creates, say, some of the drivers of, you know, high returns over time and a sustained high return, like, for example, you know, Southwest, I guess prior to 2017,

and even Ryanair, I think there are sort of two key drivers. The first is either, you know, you have a competitive advantage with respect to your network. And typically that comes from scale. So you're able to offer, you know, higher density network. That is, you know, consumers can pick between flying, you know, if they miss their flight, they can just fly, take that same flight again in two or three hours time, you know, more destinations. And again, this all comes with scale.

And that gives you a better ability to offer like a better schedule for consumers. And then secondly, there are cost advantages. So, you know, Southwest Ryanair, perfect examples. If you're in the business of selling a commodity, it's better to be the low-cost player. And then maybe the third sort of driver of a high week, I think it's related to that long capital outlay timeline. So, you know, when there are periods of, you know, really strong demand that outstrips supply growth, which I think sort of in the US, I think you saw that between, call it, 2010 and 2016. that's when you can see strong pricing.

But then, you know, this is a cyclical industry. So the players that are profitable, they'll, you know, wrap up their orders of their fleet, you know, extrapolating the profit today forward. And all of a sudden, you're left it with a relative overcapacity situation, which can take use to sort of unwind. Can I pause you there and ask a couple of quick questions just on the industry overall? And you mentioned Ryanair and Southwest, right? And I think those are interesting because Southwest, for a long time, this was a great stock, right?

And then they basically, now, maybe Southwest is so far beyond it because they basically evolved into one of the big airlines, right? But the stock pretty much stalls out from, I'm kind of looking from 2015 to today. It's basically a flat stock over the past 10, 11 years, right? Now, there's a lot of things that happen. Obviously, there's COVID and everything. but I don't think anybody would say Southwest recently has created a lot of value. And that would apply. Again, I might have a domestic focus, but I look at a frontier, a spirit, which I've got

a lot of war ruins from Spirit. All these, none of these guys have created in value. Many of them have gone bankrupt or South Spirit, multiple bankruptcies, Frontier, probably circling the drain. You know, Ryanair has been a killer. But I look at that, and I don't have the same international focus you do, but I look at that, I say like, you know, Warren Buffett's old thing, 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 kind of low-cost airlines? Airlines globally that are creating actual value? Yeah. Well, I'll point to Valas, but you've sort of helped me. Maybe I'll explain why the U.S. has sort of been like a bit of a big of a market. It's fantastic, because Mexican structure is, European structure, Mexican structure is different, and it might just be something U.S. and my domestic brain can't

handle. So please, yes. That'd be great. Exactly. Yeah. Look, I think it's, I think it's a function of consolidation. And I think the most important, probably the most important driver of airline profitability over time is relative market share. So in the U.S., you have the legacies, the big three that are like 65-ish to 70 percent of. domestic capacity. And during the period post 2008, when the orderbook growth across the industry was very low, you saw the low-cost carriers, like your spirits and your frontiers, they were really profitable, also because oil went from, what, $100 a barrel down to 40, and they'd sort of planned their fleet growth around $100 per barrel. And so they were really, really effective

in sort of capturing like spill traffic. So that refers to, you know, potential passengers who are like turned away or rejected because a flight is fully booked. So fully booked at the legacies. And I think sort of the key thing that changed in this industry beyond, you know, I guess rampant capacity additions from those like point-to-point players is, I think basic economy really changed things in the US. So the legacies, I think it started with Delta.

they made pretty significant investments over multiple years in product. So, you know, premium seats, airport loungers, you know, real estate, new terminals, concourses, and technology. And their scale combined with loyalty has helped them to basically segment fares in a way such that they can rise to discriminate and no longer spill traffic or the low-cost carriers or the point point players. And I'll give you a very sort of like an example of that. So, you know, let's say you're flying, I don't know, from Atlanta to like Orlando, right? Atlanta is United's Hub, I think about 12 or 13 percent of their capacity is there and they're the largest airline there

by quite a bit. And so, you know, in the call it the pre-COVID, pre-based, also pre-based economy world. There was ample demand and so their planes were full but now fast forward, you've had a lot more planes into the market. You've had a lot more narrow bodies into the market. And United now reserves about, I think on their cause they say about 15 to 20% of their seats on the plane are reserved for basic economy. And what that is is effectively, they will go and offer like a rock bottom fare, like $100 a ticket to basically price match the low-cost carriers. And then the rest of the plane is like premium seating whereby a lot of the passengers, right, are relatively price and sensitive because they know, again, if they miss this flight,

they can always get the next United flight in two hours time. B, they're probably paying for the flight with their loyalty points or they know their credit cards like actually, you know, they do the sort of the math of, oh, yeah, my credit card wins I can pay for it. So actually, I'm only paying 100 as opposed to 200. And so all of a sudden... Business travelers are very price insensitive. Exactly.

Exactly. And so all of a sudden, if you add up, well, at 20 points of capacity across the big three, who are 70% of domestic capacity, you now have 14 points of extremely low. cost seats. For context, Ronteer is like 3% of US capacity. Spirit, I think, is like, was like 3% of US capacity, Allegiant, Sun Country, JetBlue. Like, these guys are all, you know, they're, like, if you sum them up, they're almost equivalent in size to the amount of this dirt, dirt cheap capacity that's been added to the market. Right. And so that is like a, in my, in my view, like a pretty brutal competitive strategy.

that the legacies have been able to enact. And that's what's killed, what's killed spirit and is killing Frontier today, right? Because, you know, so let me move from the domestic market to just like general markets more broadly. And I think this will help us bring us to Valeris because there are other questions here. But, you know, I think what happened, if I could sum it up from my point, what happened was with the, in the U.S., you know, you have these huge scale advantages. And in the U.S., the huge scale advantages eventually copied the basic economy model, the spirit, the frontier model. They copied it and basically put them out of business is what has happened, right? So they've found ways the prices for it.

And again, they've got huge skill advantages, credit card advantages, operating advantages, slot advantages, all the sort of stuff. In Europe, Ryanair, I don't think, and again, I'm not as familiar with the European, Ryanair has all these things that spirit and frontier tribes copy in the U.S., but they basically have been able to stay one, step ahead of all of the legacy, probably slower European airlines, but they've been able to stay one step ahead. And I think Europe is so much more fragmented, especially with the short international hops that they've had a lot of discuss with that. I guess if I was coming to Valeris in Mexico, maybe we can like dive into that. But when I look at them, they, especially after this merger, which we definitely need to talk about, but they're pretty big. So I guess my question is they're not the

biggest. They're coming at this with a low cost model, but can, can that really succeed? Like, are they in a weird spot? Yes. I don't quite know where I'm going to, but I'd love to that. So, no, you, you, like, so, I mean, you touched on, I think, a key point. Like, in, in Europe, there are the legacies aren't, don't have as high relative market share. A. B, I think what's really helpful is there is, there are lots and lots of, like, lower cost airports as well. So, you know, I think it was on the, I think the second quarter call last year, United CEO basically mentioned that, you know, to fly into New York, I forget which particular airport it is, but the airport landing fee per passengers, $47, and JetBlue was charging $70. So how are they ever going to be profitable, right? Whereas in, you know, in Europe, there is like three airports in each city.

And so Ryan Neal 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 as landing fees. And the airports comply. And so that scale advantage plus access to, call it, I don't know, secondary, second tier low-cost airports is very helpful. And then, yeah, the legacies in, well, legacies or full-service carriers in Europe are just nowhere near as, you know, They're just not as sophisticated as those in the US. And therefore, the growth of Ryanair, like the rapid growth of Ryanair and the relative scale has tipped into their favor such that, yeah, they can have been able to continue winning over there. Now, maybe then to move on to Mexico. Yes.

This, this, like the Mexican air industry, I think is probably one of the best sort of structural stories in that, you know, this business, this industry. sort of looked a bit like the US maybe in 2006. It was basically a duopoly between Mexicana and Ere Mexico. There were two full-service carriers, similar to your Delta and Americans. And overnight, you had four low-cost carriers launch within 12 months, and there were too many seats. And what prompted what followed was basically a fair war, whereby the airline industry went from 13 players all the way down to four into 2019. So just crazy, crazy there was. Everyone was ordering new jets and when you get a new jet,

especially if it's like the next generation of jet, your cost per seat is like 15% or 20% lower than your next peer. And so, yeah, you had a pretty brutal price war. And in that time, you know, the market in terms of demand grew from 20%. grew from 25 million passengers all the way to 70 million in 2019. And most of that growth, like the structural growth in this market, it actually comes from taking share from buses. So in Mexico, you have 3 billion passengers annually who travel for several hours on these long-range buses. And they're paying like 50 to 100 bucks for a trip. And so on a dollar per hour

of travel basis, you know, flying with the phalaris is actually really, really cheap. But the, I guess the issue and why, you know, those three billion haven't converted to passengers, like, immediately is, I think it just requires like a mind shift or mind shift or behavioral shift, actually. And so a big part of, oh, gone. Oh, no, if I can, you're hitting on the slide that I have, this is from, there's a merger, we're going to talk about, there's a merger presentation from December. It's slide nine. And the thing that really jumped. out to me is exactly what you're saying. A, they describe the stories with buses and buses are biggest traveler. And, you know, I think they say other stuff like, hey, there are people

who they've never flown before. Going to the airport is a big barrier for them. But they've got the slide. They say, hey, a lot of the competition we have is buses. And 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, you know, the one that they specifically call out is Turkey's got about the same GDP as us, and people are taking 1.3 trips per year, whereas in Mexico, they're taking 0.5 airline trips per year. And 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 it is very long. They're saying, hey, if you just get that, the Mexican market is 130% bigger overnight.

Obviously, there's a lot of stats, and I'm sure they play with a little bit. But one of the things I really liked is exactly what you're saying, you know, you've got these airlines. You've probably got a lot of fixed capacity and you've got a huge tailwind for organic growth here. Yeah, yeah, exactly, exactly. And so I think over the years, you know, when I've spoken to them, they said that they would literally have their salespeople just standing at like the bus service terminals, like offering people, if it's going to be your first flight ever, you know, you can get a free first flight if you decide to come and fly with a Laris.

You know, it's a really, really big sort of natural demand tailwind. And so their traffic is mostly, you know, driven by first-time flyers and then visiting family and relatives, which means it's a little bit less sort of like, I guess, price sensitive compared to sort of leisure travel. And so you have, I guess that's the backdrop of, you know, capacity or demand, sorry, grows, you know, seven, call it seven or eight points a year. And then the actual market itself, I mean, I stopped at 2019 because I think that's a notable. sort of period. In 2019, there was only four left, right? And so you had, I think, was it the big, or the top three accounted for 76% of domestic capacity. And in 2019, you had the number four player interjet, which was sort of like a bit of a hybrid model. They weren't a low-cost carrier in that their planes were not the newest A-3-20s or B-7-37s. They were flying these old Russian jets. But in the back end of 2019, they went into bankruptcy, and I think their management team were like getting chased by Interpol.

And when they came out of the market, immediately in that second half of the year, you could see bears take a step change higher. And so, look, if I'm going to summarize the pitch right now, I think, you know, the pitch right now is today there are only three players. And with this merger, we're going to go to a two-player market. and I anticipate you will see another step change up in fares. Yeah. Let's talk about the merger.

So in December, and I want to ask you a lot of things about this merger, but in December, Valeris and Viva, I believe, is the company. They amounts to a merger of equals, right? I think shareholders were owned 50, 50%, Valeris is a little bigger debt, whatever, it's a merger of equals. They announce merger of equals, and I mean, the stock's flying higher, right, for all the reasons you're talking about. first merging two airlines together, generally, there's huge synergies.

Interestingly, they emphasize them, call, hey, these two airlines are going to operate completely separately, right? But they're going to merge them to. There's going to be synergies. It takes competitor off the market, I guess, even though they're going to operate them differently. But I want to just stop there. We can talk about the merger and thing, but I do want to ask, how much is your investment

here about Valeris, the investment opportunity, versus how much is it about, hey, this merger, if it goes through. you know, consolidates the market, turns it in total of oligopoly, tastes competitive out, all the synergies everything, because 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 like 40% higher. So the market is clearly loving what this merger does, and I think there's other stuff, too, but the market's clearly loving the merger.

And, you know, we're probably hit into antitrust and all this sort of stuff. I don't know it's a sure thing. This merger happens. So merger versus just kind of the standalone opportunity. Yeah, yeah. So look, we've been shareholders and have been following the story of Belarus since maybe 2020, 2022. And look, I think at today's price, maybe to back into your question, at today's price, 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, $10 share today. And I think if the mergers to go through, I think it's a $20 to $25 stock. So I think implied probability of it going through is actually reasonably low.

And therefore, it's great value. Let me ask about you. So as you and are talking, the stock is $10 per share on the U.S. exchanges again, just changed BLRS. 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. But standalone, I've got it at about eight times earnings. Post-merger, seven times if you ignore the synergies.

Synergies are pretty big here. I think it's about 5x with the synergies. If I just looked at the stock market, you know, Delta trades at about 10 times forward earnings. Southwest trades at about 12 times forward earnings. Now, those are obviously very different businesses. We're talking domestic. 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 7x, 7 to 8.

XRNage, 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? And again, we've laid out, there's a really attractive backdrop all that, but I just want to push back a little bit on that valuation and standalone value argument. Yeah, yeah, sure, sure. Well, look, I think so on my numbers today, today, it's about sort of the way that I think about this is I think about them on an EV-Ebatar basis. And on today's numbers at a $12 stock, you know, you're trading at $12 per share. You're sort of trading it three and a half times standalone NTM earnings or next 12 months earnings. And that's very, very cheap versus like one standard deviation cheap

versus history for Valeris just as a standalone business. And then, you know, qualitatively to think about it. I think, you know, the comparison with the US low-cost carriers sort of just doesn't make sense, right, in that this is a three-player market. This market is growing at seven points a year, steady state. The competition, the nature of competition in Mexico is like, it's so rational. It is like an airlines analyst dream in that you have, you know, Aero Mexico, which I believe is partially earned by Delta. So it's a full service. carrier, but only 20% of their capacity flies domestically in Mexico. And this is, this is, you know, their unit costs, I believe, are about 10 cents, whereas Valeris's unit costs are

four and a half. So it's, it's just a totally, like, it's just a totally different business, right? This is like, it's like a premium business. So the capacity isn't like for like. And then beyond the era Mexico, you have Viva Aerobus, which is just a smaller version of Valeris. Their hubs are in different locations. They're mostly Mexican domestic flying, but they have basically the exact same fleet. And the degree of competition between these two airlines isn't so cutthroat as what you see in the U.S. whereby Frontier puts in a new route into Atlanta and then United the next day responds by putting in three new flights in Denver and trash fares. Can I ask you why not?

because that is the one thing that jumped out to me, right? You've got this growing Mexican market, great backdrop. You know, the thing that jumped out to me is in the U.S., one of the reasons the legacy, sorry, not the legacy, the low-cost carriers were in its trouble, is lots of other low-cost carriers popped up, right? It wasn't just frontier and spirit. Then all of a sudden, you had some county and Allegiant

and all these others popped up. And in this Mexican market with these great domestic tailwinds, you know, you've kind of only got two low-cost players, And it just feels like, why don't you, if you're starting to see all these returns and you're starting to see this very vast pricing structure, why aren't you seeing, you know, Mexican entrepreneurs or ULC veterans, kind of the same way that's spirit and frontier camp? Why aren't they going over to Mexico and starting these? And like, that's, that's your man, right? You've got the, yes, it seems great. There's lots of supply.

But, hey, tons of people flood into this market. Yeah. You know what? I think that, I guess the first reason, and it comes back to that relative market share. comment that I've made is that, look, at the end of the day, you know, you and I, you know, Andrew and Phil, we go and start an airline, we try and release 10 planes to fly from Mexico City to Cancun or something. Belarus and Viva, because they are such a large proportion of domestic capacity today, they're just going to put flights at the same schedule of time slots as us.

sell tickets for $30. And within six months, you and I are bankrupt. Yeah. No, it makes total sense. I guess I was kind of wondering, you know, in the U.S., there are certain airports that have really constricted flight slots and the airlines that have them. I was wondering if Mexico had like, hey, you know, Tijuana has really constricted flight slots and they're all locked up by the big three.

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 Airport. And yeah, that's the only one. And that's where, I think, something like 60, 70% of Euro-Mexico's capacity originates or departs from that particular airport. But everywhere else is fair game.

You mentioned you and I start an airline, and I'm in, let's do it. You know, 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. But I think one fair question, one question I'd like to ask every guest, and I'd love to get your thought. And this is, you know, the market is a competitive place. What are you seeing that the market is missing? But I'd like to tag onto that question.

You are coming, we're recording this internationally. You're Australia. I'm New York City. What are you, not just what are you seeing that the market's missing, but why is like, you know, I always ask this something foreign sucks. Why are we seen from outside the borders what the people inside the borders kind of aren't seen? I think actually inside the borders, people are seeing this. I think part of the reason why it trades cheaply, well, like a lower relative valuation to, I guess the US players is number one, it's liquidity, right?

Because if this stock were more liquid, then basically anyone who covers airlines would be, would be long. And in fact, I've spoken to other investors who want to own the stock, but they can't own it because it doesn't, it's not liquid enough for them. And so, yeah, I think, I think the reasons to own it, like the structural reasons to iron it around, you know, competition, relative market share, you know, demand growth. I think I think they're pretty obvious. Does the merger help up with that? Because again, it's a 50-50 merger. They're merging with a private company, but eventually those shares come online. Right now, if I'm looking at kind of trades five million bucks a day, which,

you know, I think is these little good, but you imagine over time, debt can really float as kind of legacy holders of the private business start selling off. Well, that's my, that's, that's my hope. Absolutely. I mean, in, in terms of that merger, I think, you know, beyond just the consolidation, I think you also have, like, from like a strategic point of view, I think it's great because so, like, Indigo partners, which are the, they own 18% of the Valeris stock today, you know, it's a private equity firm founded by Bill Frankie, who arguably, you could say, is the godfather of the low-cost carrier model. And what they do is they pull together their airlines, orders,

an airbus to get bulk pricing advantage, or bulk pricing, and hence you get a cost advantage on the actual aircraft itself. But then on the other side of the transaction at Viva, the owner of that business also owns the largest Mexican bus conglomerate. So it's not just a second business. It's like probably the ultimate customer acquisition funnel for the airline, right? And so when the two come together, you benefit from a lower, lower purchase price of your actual fleet. And then B, you know, you're able to mortise that better customer acquisition cost across two types of passengers.

Let me go to regular story. You know, you mentioned this is a pretty concentrated market already. and you've got two players who are arguably the biggest competitors merging together. It strikes me, like, when I read, I went and read the merger call, and a lot of that merger call seemed to me to be talking to regulators about why they should prove this, right? Again, number one would be, hey, we're not even going to merge these brands together, right? The consumer won't even know there's a difference.

They're going to compete with each other. When I see that, you know, Paramount HBO with Netflix, Netflix coming out and be like, we would never merge HBO and Netflix together. I mean, that is talking to regulators. When I look at the merger deck, they're talking about how many jobs are going to be creating everything. Like, it seems like they're really targeting the regulators. So I guess, you know, I would just ask you, why would regulators allow kind of the number two, three, four players to merge together here? Yeah, yeah.

Yeah, I mean, look, I think I remember when the merger was announced, I was talking to someone at the firm and I was like, this is just so, like, incredible. incredibly brazen. Like, I think on every metric, if this were to be sort of judged by the DOJ, it would fail, right? In that... Maybe not under this administration, but certainly the last one. That is true. That is true. But, you know, the degree of consolidation here, the degree of root overlap, it's pretty, it's pretty punchy or eye-watering, actually. I think the arguments would be, you know, there are, there's actually probably, it's probably the logical conclusion of a global trend of consolidation in airline markets to improve profitability. So, you know, Ireland, Australia, Canada, India, Chile, and even now recently, South Korea, basically they have a, they will have a airline that has maybe 60% plus of domestic capacity. And I think the pitch that, that Olarus perform entity will be making to the regulator is that, you know, we are able to lower costs and therefore it makes us more comfortable to invest and accelerate our fleet growth,

such that we can make low-cost flying more accessible to the hundreds of millions, or call it billions of potential passengers who are still flying on the buses. Also, I think they would say that, you know, actually more passengers travel to and from Mexico into the US through the big four carriers than any of the Mexican airlines even combined. So there is probably a pitch to protect maybe sovereignty over the skies. That would be sort of like a national interest thing. And then, of course, they talk about, as I mentioned, the potential to accelerate fleet growth. And so 40% of Belarus's routes, they only compete with buses.

And they've showed how they are able to maintain very low base fares to stimulate demand. And so I think that's a great point that the regulators hopefully will take into account. So cost reduction will help them to keep prices lower. And then maybe another one, and this is, you know, this is classic EM. The former president of Mexico, AMLO, he, He was obsessed with building a new airport called Felipe Angeles or Aifa. And it's in Mexico City, but like much further away from the larger core Mexico City airport. And the airports run by the military.

And so the actual flight capacity coming out of this new airport is very, very low because it's maybe at one and a half to two hours to get into the core of Mexico City from that airport. And so, you know, to support this huge infrastructure buildout, the government actually relaunched their own state-owned airline called Mexicana. And it was framed as like a pro-competitive move. You know, 18 months later, their losses are like, I think maybe like a negative 60% EBITDA margin, only have five planes. And so I think the pro former entity, Valeris and Viva, what they can do,

is they can play into that sort of ambition by rediverting a bunch of their capacity from Mexico City. And Mexico City is a lot constrained so they can give up their slots there and move a lot of their capacity to IFA. And then the government can tout this huge project as a win. Just chef's kiss, no notes, just incredible stuff from the government starting their own airline and everything. No, I'm just looking at this. It's just crazy. Like, you know, domestically, you forget, get about some of the stuff or you don't think about it. But I'm looking at Valeris's website and like, you know, you can pay by credit card, but they also offer you can go and pay by cash at Walmart and one of the local big convenience store, 711, OXO.

It's just crazy. You know, they've got Mexico City to Guadalajara for $7 for a flight. You know, you forget. There's a lot of different things that haven't kind of been in a double. emerging market along these sort of things. So one quick question. Look, you said you started off with a journalist. I think you're a lot more specialized in airlines than you give yourself credit for it,

because this has been a masterclass and just airlines across the globe. But when I was reading their call, one of the things they talked about, I can't remember this merger call or an earnings call I was reading. They talked about grounded planes, and they mentioned from the top of my head, they had like 157 planes, and I think they said 37 of them were grounded. So that's over 20% of the fleet. I'm not an airline expert, but over 20% of the fleet grounded sounds like crisis levels to me. And they were kind of talking about like par for the course, hey, hopefully we get a little better.

What's going on with the grounded fleet here? Yeah, yeah. I mean, you know, as a as a shareholder in the stock when that first was announced, it was pretty painful. But, yeah, basically what's happened is Ratton Whitney are the manufacturer. Oh, okay. I remember this from the spirit thing. it's the jet issues that Pratt & Whitney was having, and Pratt & Whitney's probably going to need to pay a pretty penny.

Okay, I thought it was their maintenance, not Prad and Whitney engines. If you want to explain it, please, I don't want to leave listeners, but completely know what you're talking about now. Okay, great. Yeah, yeah, so Prad and Whitney, you're an Airbus engine manufacturer, or sorry, an engine and manager selling into the Airbus, a 320 and 831 program. They had this powdered metal issue within their engines,

And basically one third of the global fleet of these A320 Nears has been grounded since mid-2020 and so those, it was actually just incredible, right? Because all of a sudden you've got a third of your fleet grounded, but you're still paying leases on a monthly basis, right? And the way in which that the companies were reimbursed by Prattin and Whitney's, you'd receive maintenance credits that they would report as like as a negative operating expense. So not actually a cash credit, but it means that when your engines need to go in for their next shop visit for maintenance, you don't have to pay any cash up front.

But I think that's that has that hit the stock in early, call it mid-20203. And it's absolutely weighed on the stock. So maybe just to talk numbers, right? Like, these guys pay roughly 350,000 bucks per month per craft in the lease expense. And the Pratt and Whitney comp that they've been receiving is call it $200,000 per month. And so the compensation that they've received has been actually far less than what they are paying just in the fixed cost of the planes. And that doesn't actually even take into account the fact that this company has also been hoarding labor, right?

because if you initially the view as this would be all solved within two years. Two years later it still hasn't fully been solved. They still have the same proportion of the fleet on the ground, unfortunately. But they've been hoarding labor, and so you're paying that extra fixed OPEX as well. And so they've been analyzed from a cash flow perspective over the last two years, and therefore, I think, dramatically underowning. So they're expected to have their full fleet back and flying. by the end of 2027 and they've adjusted their fleet delivery plan with Airbus such that

extended out the deliveries that was supposed to come, I believe, next year and through to 2030, such that rather than getting a new plane in, let's just grow as we have our aircraft on the ground return back to the air. So yeah, like just rough numbers, you know, in 2020, 2023 and mid-20, 24, they were earning on my numbers without taking account, taking out the credits, they were earning something like 700,000 bucks per month in Iberda per plane. And that's with their full fleet flying. Today they're earning 700,000 bucks. I think they'll earn a little bit more per plane per month.

But that's with one third of their fleet grounded. So maybe you can shave the Iberda per month per plane down a little bit, given, you know, with more capacity entering the market, you know, 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 two years. Just for Laris itself. And Viva was equally impacted because they have basically an identical fleet. And the same proportion of their fleet were also affected by this. So I guess luckily, these guys didn't have, you know, suffer like significant market share loss.

Because the worst case scenario, obviously, is like you're flying a Pratt and Whitney fleet and your competitors flying above a 737 fleet. And you're all that planes are grounded. And they have all this free market share. And they get pricing as well. It is one of the reasons I can't believe Prad and Whitney. I mean, I haven't followed this in a while. It was a big thing with the spirit merger back in the day. But I can't believe what Prad and Whitney offered.

but let me on the plane issues the largest Mexican air Mexico or whatever do are they having issues here too because it is interesting right if you've got 20% of the supply taken out for everyone then everyone's actually going to be much more profitable right if you've got as you said if you've got it for only one player then all the other players kind of have a field day but if it's for everyone so i'm i'm kind of curious like hey if the largest player is having 20% taken out too you're going to have a lot of supply coming online at one one point but if you said hey the largest player is only on Boeing, so they didn't have any of their fleet. Then it's kind of like, oh, cool, the two-smallest players get 20% more.

They're really going to do well there. Yeah, so Air Mexico flies a Boeing fleet. Okay, so they were not impacted. They were not impacted by it. But again, like, they don't actually compete with Valaris and Viva. So only like 20% of, you can think of it, 20% of their fleet flies domestically in Mexico. And the rest is like, you know, Mexico to Europe, Mexico to, I don't know, wherever else, international destinations because with a with a if you have a wide body is in your craft and you can do

international that's that's really really profitable business um as we're seeing in the um at the the u.s guys so yet yes they benefited their mexican business which is you know probably one-fifth of their operations would have benefited from you from a um call it base fair's perspective but it wasn't an outsized game because again the capacity isn't like for like it's perfect Phil, we're kind of coming up towards the end of an hour. I've actually, again, I think you've done not just on this, but just overall talking about the international airline landscape. I've learned a lot here, but I do want to ask any last questions

or anything we should kind of leave listeners thinking about here. Maybe I just talk about what I think it could be worth. Yeah, that'd be great. Yeah, yeah. So, look, I think I think I referenced earlier in 2019 when Interjet collapsed and this went from a four-player market to a three-player market, you saw base fares lift by about $8 per passenger, and that's even with oil actually coming off, right? So you know it's like it's true pricing power. If you see a similar increase in Iberda per passenger, and you factor in

a little bit of synergies, so, you know, typical merger synergies in airline industry are like three to six percent of revs. You know, if you put the midpoint there, then I think this stock is at about $2.50-ish of pro former EPS. You know, global low-cost carrier winners, share winners trade eight to ten times. So I think it's, you know, a $20 to $25 stock. And, you know, downside if the deal fails and like people who are involved in this stock for the merger, like flush out, and like it may be at worst trades back to like seven or eight. If they don't do the merger, right, so let's see this merger is as my worry.

I think you've actually probably got it right. There's a lot of political flavors to be traded off here. But if this merger doesn't go through, what's the plan for standalone Valaris at that point? Same as what it was prior to the merger. So they've already pushed back or deferred those new deliveries. So they'll just grow into their existing, grow into their total fleet. And then the share gain should be sort of like, yeah, share gain should be split 50-50 between Viva and Valeris based on that their contracted order book growth.

And so really, the majority, 50% of their growth tends to come from, like, thickening existing routes. So as in adding flights to where you're already flying, and then the rest comes from new routes. So it's not, you know, 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 antipities, reach out to you, any of that if they want to? Yeah, yeah, thanks. So you can go to antipities.com.

So we are a, you know, we're a Sydney-based global fund manager with long-only and long-short products. We manage about 13 billion in fund. And I specifically work for the global small mid-cap strategy. So if you go to antipities.com, there should be a global smid product there that you can see. And we recently launched the fund actually onto the eighth. ASX. So you can, you know, if you're interested in following what we get up to, you can subscribe to our, to our newsletter for our insights. Yeah. No, that's great. And you are correct.

I'm looking at the website. I see the Antipodes, Smith, the active ETF. That's really cool. Yeah, look, 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 style. So, Phil DeMara from Intipides, this has been awesome. Thanks so much for coming on. Thanks for having me. A quick disclaimer. podcast should be considered investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor. Thanks.