Significant events
Vueling made a net loss of 23 million euros in the first quarter of 2011. Losses are usual in the first quarter of the year due to the seasonal nature of the airline business. The results this quarter have been affected by the 41% rise in the price of fuel. Furthermore, it should be added that the first quarter of the previous year included part of the Easter week holiday period, which in 2011 falls fully in the second quarter of the year.

The company had not planned any increase in its fleet and therefore in capacity for the first quarter of the year, but the high fuel prices (41% up on the previous year) made it necessary to selectively reduce the number of flights operated without affecting the service so as to optimise the profitability of the routes.

Vueling achieved a 127 million euros turnover in the months from January to March 2011. The number of flights operated fell by 5% as the sharp increase in the price of fuel made it necessary to reduce frequencies so as to optimise the profitability of the operations. Furthermore, tougher competitive pressure in the routes operated by Vueling and the concentration of the Easter period falling in April, when last year it fell in March, affected the unit revenue per available seat kilometre, which fell by 4.6%. As a result of both effects, revenue fell by 10% compared with the same period of last year.

Fuel costs increased by 20% while other costs did not increase. The price of fuel has risen to 968 dollars per ton, 41% higher than the first quarter of the previous year, when the price was 686 dollars per ton of fuel. The reduction in the number of flights and the company’s hedging policy reduced this increase in fuel costs to 20%. Other costs have remained stable thanks to the cost contention programme which the company has been continuously implementing since last year.

Vueling carried 2,068,942 passengers in the first quarter of 2011, a fall of 7% compared with the same period of last year. The company operated 16,860 flights, achieving a load factor of 69%. Vueling continues to maintain its leadership in El Prat airport in Barcelona with a market share of 22%, nine points ahead of its closest competitor.
Vueling’s financial structure continues to be very sound. Vueling has a net cash position of 206 million euros. Despite the Loss for the quarter, at the end of March, the company maintains the same cash position as at the end of the previous year as the cash flow for the first quarter amounted to -1.5 million euros.

Outlook for 2011

Growth
From the second quarter of 2011, Vueling expects to begin a growth stage which will lead it to carry 12.5 million passengers, 15% more than in the previous year. This growth will take place through two types of operations. 48% of the growth will be due to the agreement between Vueling and Iberia to operate a series of short and medium haul routes to and from Madrid airport, which is in force from March to October (extendable). The rest of the growth (52%) will take place as a result of an increase in bases, routes and frequencies within Vueling’s own network. In order to achieve this growth, Vueling will increase its fleet to 47 aircraft, (5 of which correspond to the operations with Iberia in Madrid).

Differentiation strategy
Over 2011, Vueling will continue strengthening a competitive strategy which allows it to develop those attributes which differentiate it from its competitors.

Accordingly, Vueling is going to increase the number of connecting passengers both with Vueling and with other companies. The number of connecting passengers is expected to be greater than 742,000, four times higher than the figure for the previous year.

In addition to the connections between its own flights (Vueling-Vueling), since March Vueling has begun the sale of new connections with other airlines through Barcelona airport (to Miami and to São Paulo) and through Madrid airport (to multiple intercontinental destinations). Vueling will operate seven new routes from Madrid: Warsaw, Bucharest, Majorca, Alicante, Malaga, Lanzarote and Fuerteventura. The new routes allow VUELING to feed Iberia’s long haul flights and to increase the company’s usual point-to-point services. These operations in Madrid airport correspond to the agreement reached with Iberia to operate some of its short and medium haul routes from Madrid over the period from March to October.

With the start of this operation, Vueling demonstrates its capacity to successfully operate connections for other airlines. This opens the door for Vueling to feed long haul flights for other airlines.

From April, Vueling increases its international presence with two new bases in Amsterdam and Toulouse. Two new routes are created in Amsterdam and the frequency in existing routes is increased, thus reaching a total of 9 routes from the Dutch capital. Toulouse is a new destination and 7 new routes are operated from this base, both to Spanish destinations and to the rest of Europe. A total of 1.2 million seats are available on the Amsterdam and Toulouse routes. Bookings to date on these routes are performing slightly better than on the company’s other routes.

As it has been doing over this quarter, Vueling will continue to strengthen its presence in the off-line channel (travel agencies and tour operators), which in this quarter have increased from 41% of revenue from ticket sales to 55%. This channel allows Vueling to access the business traveller segment, which offers greater profitability.

Vueling will also continue to strengthen and innovate its products so as to continue increasing ancillary revenue. Accordingly, it expects to continue the trend of the first quarter of the year, in which the average ancillary revenue per passenger increased by 2.5% to €8 per passenger.

Over 2011, Vueling will also continue to strengthen its brand, which has a high level of awareness in Spain (98%). In addition, the company will continue a constant process of optimising and improving customer management and personalised content processes at www.vueling.com.

Vueling will continue strengthening its operational excellence as it has done over the first quarter of 2011. In this period, the level of punctuality reached 90% and the level of recommendation increased to 93%. Vueling aims to maintain these levels of operational excellence.

In 2011, Vueling plans to continue with its cost reduction process, which involves over 75 initiatives to allow annual savings of 13.1 million euros. A saving of 1.5 million euros has already been achieved in the first quarter, and 71% of the savings planned for the whole year have been realised.

The outlook for 2011 presents a series of opportunities, on the one hand, and risks on the other:
With regard to the opportunities, firstly, Vueling envisages the possibility of a greater process of consolidation of the services offered on the markets in which it operates. Secondly, there is an opportunity to extend the agreements to feed other companies’ flights. Finally, the Spain-Europe market is expected to grow, which Vueling could take advantage of.

With regard to the risks, the increase in the price of fuel is a significant threat for the whole airline sector. Another risk is the weak performance of demand in the Spanish domestic market. Similarly, the significant fall in fares could continue over the coming periods, although an increase in competitive intensity is not expected.

Vueling expects to achieve a 15% passenger growth, half of which will come from Madrid operation. This operation will allow an increase of 810,000 passengers (310,000 in connecting flights) with 7 new routes. More interline agreements with other airlines will be completed through 2011.

Finally, with regard to costs, the company expects to maintain a similar cost level to that of last year excluding fuel, i.e. a cost per available seat kilometre around 4.07 euro cents.

BUSINESS DEVELOPMENT FIRST QUARTER 2011

Market situation
The Spanish market1 grew by 6.6% in terms of passenger numbers. This growth is driven by a positive development of the Spain-Europe market (9%), as the domestic Spain-Spain market still shows weak growth (1%). Excluding new route seat growth operated only when local governments provide substantial support, the domestic market (Spain-Spain) fell by 1% and the total market (Spain-Spain and Spain-Europe) grew by 5% (1.5 points less). Vueling is increasing its international presence, which includes 56% of passengers, three points higher than in the same period of last year.

However, competitive intensity has increased significantly in the markets in which Vueling operates. The increase in competition has been especially significant at Barcelona and Seville airports. Of all the routes operated by Vueling, approximately 75% overlap with three or more airlines. This percentage was only 60% in the first quarter of last year. The outlook is that this competitive environment will remain steady in 2011.

Increasing competitive pressure and the weak state of demand has led to a sharp fall in fares by all market agents. Accordingly, the average fare fell by 15% compared with last year in the routes with competition. The situation has limited the possibilities of passing on the increase in fuel costs to prices.

In the first quarter of 2011, Vueling was affected by the sharp increase in the price of fuel. The price of fuel reached an average price this quarter of 968 dollars per ton, 41% higher than the first quarter of last year, when the average price stood at 686 dollars per ton of fuel. Changes in the dollar exchange rate have not helped to mitigate this increase.

Activity
For the first quarter, Vueling had not planned any increase in capacity (it had the same number of aircraft as in the previous year), but the sharp increase in the cost of fuel forced the company to carry out a selective reduction in capacity without affecting the service offered to its passengers, which led to a 5% reduction in the number of flights. The company carried 2,068,942 passengers, 7% fewer passengers than in the previous year. In addition, the comparison with the previous year was affected by the fact that the first quarter of 2010 included part of the Easter holiday period, which this year fell fully in April.

Revenue
Vueling achieved total turnover of 127.15 million euros in the first quarter of 2011. This figure represents a fall of 10% compared with the same period of last year, which included part of the Easter holiday period. Without taking into account the Easter effect, revenue fell by 8%.

The number of flights operated fell by 5% as the sharp increase in the price of fuel forced us to reduce frequencies so as to optimise operational profitability. Furthermore, the increase in competitive pressure on the routes operated by Vueling and the concentration of the Easter period falling in April affected the unit revenue per available seat kilometre, which fell by 5%. The result of both effects explains the fall in revenue compared with the same period of last year.

Costs
Total costs increased by 5% compared with the same period of last year. The main increase was in the cost of fuel, which rose by 20%. Other costs remain constant, at the same level as the previous year.

The increase in the price of fuel was very significant over the first quarter of 2011. The average price of fuel from January to March 2011 was $968/mT, while in 2009 it was $686/mT. This represents an increase of 41%. This rise had a significant effect on Vueling’s cost base. Even though the company’s hedging policy helped to mitigate this price increase, unit fuel costs per available seat kilometre (ASK) rose by 28% in the first quarter of 2011 compared with last year. The sharp increase in the cost of fuel forced the company to rationalise its flight schedule. This rationalisation was carried out in order to optimise profitability of the flights operated and was implemented selectively.

Other costs remained at the same level as the previous year. The company has successfully implemented a cost reduction programme which allowed savings of 1.5 million euros in the first quarter. Over the whole year, the cost reduction programme will allow savings of 13.1 million euros through 75 different initiatives. At the end of the first quarter, 71% of the savings had already been realised.

The unit cost per available seat kilometre excluding fuel stood at 4.56 euro cents, 7% up on the same period of last year. This unit cost was affected by different factors. The greatest impact was that resulting from the selective reduction in capacity carried out as a result of the increase in the cost of fuel, which led to a reduction in use of the fleet. Another impact was the costs associated with opening new bases and the Madrid operation with Iberia. However, Vueling expects to maintain its ex-fuel unit cost in 2011 at levels similar to those of last year.