Grupo Aeromexico SAB de CV (AERO) 2014 Q2 法說會逐字稿

Please stand by. We're about to begin.

Good morning and welcome to Grupo Aeromexico's second quarter 2014 earnings results conference call.

Before proceeding, I would like to mention that certain comments made during the conference call may constitute forward-looking statements regarding future events or the future financial performance of the Company. These statements are based on the current beliefs and expectations of management and the Company regarding future events or future financial performance.

Forward-looking statements are based on management's current assumptions and on the information currently available and do not guarantee the Company's performance. The timing of certain events and actual results may differ materially from those projected by forward-looking statements due to a number of factors, including but not limited to those inherent to our industry as well as commercial, economic and other risks and uncertainties.

At this time, all participants are in a listen-only mode.

I would now like to turn the conference over to your host for today, Luz Montemayor, Aeromexico investor relations officer.

Good morning everyone and thank you for joining us in our earnings conference call. Today, Andres Conesa, Grupo Aeromexico's CEO, and Ricardo Sanchez Baker, our chief financial officer, will review key highlights of the second quarter of 2014.

I would like now to turn the call to Andres. Thank you, Andres.

Thank you, Luz, and good morning, everyone. And thanks for joining us on our second quarter conference call. Let me provide you with some highlights for the quarter and for our strategy going forward.

In this quarter, we continue to experience a challenging environment due to the slowdown in economic activity in Mexico and to the significant ongoing capacity expansion in the Mexican airline industry. Both have negatively affected yields.

Additionally, we experienced pressure on the cost side in the second quarter due to the 7% increase in fuel prices and the 4% depreciation of the Mexican peso relative to the US dollar.

Despite these factors, we were able to achieve operating profits for the 17th consecutive quarter. We were able to increase our market share and to generate a positive cash flow from our operation.

Ricardo will comment with more detail about our financial results, so I would like to take this opportunity to briefly discuss some key factors that influenced our second quarter numbers.

With respect to our capacity discipline, we have moderated our growth rate in line with the guidance we gave you on our previous conference call and that calls for an ASK growth of between 12% and 15% for the whole year.

In the domestic market, our capacity increased by a conservative 2.5% due to the reallocation of some capacity to the international market and to others that [are meant] for chartered flights operations associated to the World Cup in Brazil.

On the international side, ASKs increased by a record 27.3% during the second quarter. As we continue strengthening our premium [wide body] product offering, incorporating five new Dreamliners 787 aircraft over the past year.

This has resulted in considerable capacity growth in markets in Europe and in Asia due to the additional seats that these aircraft provide. For example, each 787 has 42% more seats than the 767-200 that it is replacing.

Additionally, charter operations related to the World Cup contributed with one-fifth of our capacity growth in international markets during the quarter.

Let me talk briefly about the current environment in the domestic market. Capacity expansion in the industry of almost 8% during the first half of the year and weak economic growth which totaled 1.5% in the same period have pressured yields downward. Nevertheless, Aeromexico has been able to successfully weather these challenges in the market through capacity discipline, resulting in a [load factory] increase of almost 7 percentage points in the first six months of the year.

We were the only airline able to win market share with this expansion of capacity, which was, again, less than the growth in passengers that [we bring] for the first six months of the year. With the additional capacity of 2.3 percentage points in the market, our market share reached 38% in the first five months of the year.

In international market, we have served [rational behavior in average herds]. However, in those markets in which we are at significant capacity through the incorporation of our Dreamliners we have seen short-term pressure on yields as expected. Nevertheless, we are confident that we've managed the [lows] appropriately and that we have been successfully optimizing our revenues.

While the [minor] sector in this quarter has still resulted in pressure on revenue for ASK and yields, our revenue management strategy is beginning to pay off in some of these international markets.

Overall, yields for the second Q decreased by 12.4% compared to the previous year. Nevertheless, when we compare sequentially second quarter of this year to the first quarter of 2014, our average [for] increased by 3.4%.

We again believe our revenue management strategy is on the right track and we should continue to optimize revenue in the following quarters.

Ricardo will later comment in more detail our capacity growth expectations for the remainder of the year.

I would like now to take this opportunity to brief you on some of this quarter's achievements related to our network strategy.

Our initial (inaudible) in Mexico City Airport continued to strengthen our position in this which is our main hub. We are operating an [eight bank] connecting structure and expect to increase that to 12 by the end of this year. This will allow us to better capitalize our uniquely strong position in Mexico City's slot constrained airport.

We are making more efficient use of these slots by replacing ERJ-145s with larger and more efficient aircraft. Our strategy has resulted in better connectivity, which has increased from 28% at the beginning of the year to 31% at the end of the second quarter.

We have also enhanced our Aeropuente shuttle product to further consolidate and strengthen our position in Mexico's three largest and most important business markets. That is, the triangle between Mexico City, Monterrey; Mexico City, Guadalajara; and Monterrey, Guadalajara.

Moreover, we remain committed to develop our Monterrey hub for the long-term, offering a better product for our business passengers.

A few weeks ago, we announced several initiatives that I'd like to share with you. First, we rescheduled our capacity to Monterrey and provided for additional connectivity. In particular, we implemented our first connecting [bank] structure to [deliver] connectivity to 19 destinations in the domestic and international markets in this important city. Second, we added five new destinations from Monterrey, including routes to business markets as well as elected direct flights to certain leisure destinations in Mexico.

Enhancing our international offering via our Monterrey hub is one of Aeromexico's key initiatives. In this context, after considerable detail analysis, starting next September, Aeromexico's Tokyo flight will be operated from Monterrey, replacing the layover in Tijuana. This will be the first direct [destination] from Monterrey to Asia and constitutes an initial step in supporting this region's growth while positioning this important city in a global perspective.

Turning to the international market, we continue strengthening our position and improving our product offering with our Dreamliners. Additionally, at the end of June, we introduce our new destination to Rio de Janeiro, anticipating what we believe will be strong business passenger demand driven by the energy sector and energy reforms.

We have also continued to experience success with our Aeromexico Contigo products. Going forward, we expect to continue fine-tuning capacity, adapting to seasonal market demand in order to maintain the current level of supply.

We will continue to focus on improving our [overall] product and service offerings to enhance our passengers' travel experience.

Latest initiatives including the following -- we have recently unveiled a couple of weeks ago our new in-flight menus for Aeromexico's premier class and coach passengers on medium and long [term] flights starting in Mexico City. Our new menus were created by a Mexican cuisine collective led by Chef Enrique Olvera whose restaurant in Mexico City is included in the list of the world's top 50 best restaurants.

We also began the process of adding individual entertainment systems to our narrow body 737 [fleet]. With incorporation of new aircraft and the ongoing retrofit program to existing aircraft, we expect that at the start of 2015, all of our 737-800s will be fitted with individual entertainment systems in the entire cabin.

Last but not least, we remain fully committed to keeping our costs contained. We have a strong pipeline with cost reduction initiatives that will continue to make our airline more efficient.

In labor, our goal continues to be long-term relationships with our unions. We are confident that the spirit of collaboration can translate into further labor agreements to drive productivity. Ricardo will review some of these cost initiatives in more detail.

Looking ahead to the end of this year, we will continue to maintain our leadership position for our differentiated pricing and revenue management strategy. We are confident in our ability to continue decreasing our non-fuel costs year-over-year.

We also believe that the Mexican economy has bright and promising prospects for growth. The recent approval of the telecommunications reform and the positive steps for the implementation of energy reforms will undoubtedly increase our potential output.

The entire Aeromexico team is committed to executing our well-defined strategy and focusing on the opportunities ahead to continue strengthening Aeromexico's market position as Mexico's premium carrier.

With that, I'll hand the call over to Ricardo, who will review with you our financial results. Thank you very much and please go ahead, Ricardo.

Thank you, Andres and thank you all for joining us on today's call.

Let me go briefly on some of this quarter's financial highlights. As Andres mentioned, this quarter was based on challenges, including a weak economic environment, peso depreciation and higher fuel prices which affected our financial results.

This quarter was also affected by the Brazil World Cup, which had a significant impact in our seat allocation during June. We estimate that 3.6% of the ASKs produced during the quarter were allocated to charter, [here] substantially higher than the 1.5% allocated to charters last year.

Many domestic markets experienced capacity adjustment as we made room for the World Cup charter operations. This factor, together with continued yield pressure in some domestic markets reflected [in a contraction] of 4.6% in domestic passenger revenue compared to the second quarter of 2013.

The remaining components of revenue presented positive trends. Charter revenues reach MXN403 million this quarter due to the positive impact of flights related to the FIFA World Cup.

Cargo revenues grew 19.6%. This was our third consecutive quarter with significant year-on-year revenue increases in this area of our business.

We believe that the 787 extra cargo capacity, combined with an improving economy and the commercial initiatives we have in place will continue to positively impact Aeromexico's cargo results moving forward.

Ancillary revenues including excess baggage increased at a healthy rate of 20.5%. More importantly, we still see further opportunities to expand our revenues as we increase the distribution of our current products and develop new products.

For example, we are currently developing new technology to give passengers additional options for purchasing our Aeromexico Plus seat, which provides extra leg room and preferential boarding proceedings. This can be done at any time prior to the trip.

On the expenditure side, the trend continues to be positive and our cost reduction strategy is on track to continue improving our cost structure.

Second quarter [product] cost per ASK in pesos decreased by 0.9% year-on-year while our [cost] excluding fuel decreased by 3% year-on-year.

It is important to note that we achieved these reductions despite some significant negative pressures -- a 4% depreciation of the Mexican peso, an increase of almost 7% in the price of fuel expressed in pesos which generated MXN225 million of additional cost pressures, and pressures on our cost due to the extra capacity allocated to the World Cup charter flight.

These operations have higher [unique cost] than regular operations, generating additional pressures in our unique costs.

Our second quarter total cost per ASK expressed in dollars decreased by 4.3% year-on-year while our cost in dollars excluding fuel decreased by 8.1%. We expect that this positive momentum in cost reduction will continue for the balance of the year.

As we have said in the past, our cost control initiatives are primarily focused on three different fronts -- the streamlining operational and initiative processes, our fleet strategy and final the ongoing [growing] of new and more productive labor contract. Let me talk briefly about each of these fronts.

We began in May using a new generation of trolleys on our aircraft. These new trolleys offer lighter weight and improved durability and will help us to achieve annual savings in fuel of approximately $1 million.

We are also on track in the installation of our Split Scimitar Winglets for our 737-800 aircraft which generate additional savings of about 17,000 liters of fuel per aircraft each year. As of today, more than 50% of our 737-800 aircraft have these split winglets and we expect to close the year with these new winglets in all our 737-800 fleet.

We are also focused on achieving additional initiative efficiencies to the divestiture of our ticket offices and of our Gran Plan business. We will provide more details once we have completed this process, which we expect to be by the end of year. But we estimate interesting savings in distribution and initiative costs from these initiatives.

Regarding our fleet renewal strategy, we plan to continue phasing out the Embraer 145 from our Mexico City operations throughout the year, a strategy that has strengthened our position in the Mexico City market.

As of today, we have decreased the number of Embraer 145 aircraft operating in Mexico to another (inaudible) aircraft in June 2014, resulting in a decrease in departures of 41% as compared to June of last year. We expect these numbers to continue decreasing for the rest of the year.

Therefore, we continue to make more efficient use of our [slots] in this constrained airport. Substituting the Embraer 145 with 170s and 190s also provides Aeromexico with additional efficiencies between 16% to 25% in estimated [cost].

Our 787 operations continue to consolidate and improve in efficiency. Our existing itinerary covers daily frequencies from Mexico City to Paris and New York, four weekly flights to Tokyo and three weekly frequencies to London and Madrid. With [five] aircraft, this allows us to have one of the highest utilization rates for this type of aircraft in the world.

This quarter, we began to operate our new 787 maintenance fleet, a personal maintenance training system which makes Aeromexico one of the world's first airlines to have its own training system. This allows us to reduce our trading cost as we are able to train our 787 aircraft engineers at our own facilities without the need to travel abroad.

Going to our bottom line, second quarter operating profit before non-operating revenues and expenses reached MXN202 million with a 2% margin. With this results, we have achieved 17 consecutive quarters of positive EBIT margins.

This quarter Aeromexico received MXN92.3 million in capital stock reimbursements from PLM, a subsidiary that manages Club Premier, our loyalty program. We this reimbursement, our adjusted EBITDA reached MXN1.8 billion with a 17.5% margin this quarter.

We commented on last quarter's call that we had made a decision to [more rate] capacity growth for 2014 to an estimated ASK growth between 12% and 15%. Aeromexico's ASK have increased by 14.6% in the first six months of the year, which is in line with this guidance.

Capacity discipline will continue to be the cornerstone of our growth plan. As such, we have adjusted our plan and we now target to end this year with 121 operating aircraft rather than the 123 operating aircraft that we mentioned before.

We are taking advantage of our [lease] contract [flexibility].

We expect ASK production to accelerate in the second half of the year moving closer to the lower part of the range of 12% to 15% for the full year.

With respect to the important events that occurred during the quarter, in May, we announced the successful reopening of our peso-denominated bond program CEBURES on the Mexican stock exchange [with the reopening] for an additional amount of MXN1.5 billion issued on the CEBURES program for up to MXN5 billion and it is backed by cash flows from [petty] cash flows [arrived] from ticket sales through ticket offices and travel agencies in Mexico.

We will continue to evaluate similar opportunities in the capital markets going forward in line with our strategy of increasing the percentage [of increasing] our portfolio and obtaining better ownership costs versus operating [this].

This quarter, we were able to repatriate from Venezuela all of our cash corresponding to 2013 sales. As parts of our agreements with the Venezuelan government, we executed several transactions that allowed us to recover all our requested amounts for 2013 without having any significant [change] rate loss.

We will continue to monitor closely the situation in Venezuela to make sure that we are conservative in our capacity and in our sales [program].

Finally, net cash flow from operating activities amounted to almost MXN1.3 billion during the quarter. We maintain a strong liquidity and a solid balance sheet.

At the end of June, our cash balances amounted to MXN4.97 billion and a ratio of adjusted net debt to adjusted EBITDA amounted to 4.4%.

With this, I would like to conclude my remarks. Thank you once again for joining us today and we now would like to take your questions. Thanks.

Thank you. (Operator Instructions).

And we'll take our first question from Michael Linenberg with Deutsche Bank.

Hi everyone. It's actually Richa Talwar filling in for Mike. So, my first question I guess is for Ricardo on the increase in the cash. It's about a 40% increase and it seems like much of that is related to the CEBURES MXN1.5 billion deal you guys did.

If that's it, can you talk about what you intend to do with that cash? Will it be used for refinancing purposes or just to shore up the balance sheet? Just if you could speak to the plan on that, that would be helpful.

Thank you, Richa. Yes, I mean, as we mentioned, we had a strong cash flow generation in the quarter. We generated around MXN1.3 billion. We also had an important investment in fleet equipment and also the important payments of [PED] that amounted to around MXN1.2 billion, no? So, these two things basically netted out, no?

And as you mentioned, the CEBURES issuance is basically [receiving] and increasing in cash as we anticipate. And the idea of this was the take advantage of this opportunity in the Mexican local market where we saw important liquidity opportunities and we took advantage of that. And the idea is basically to strengthen our balance sheet, to strengthen our cash position and to be able to be more flexible for our fleet operations going forward.

Okay, great. And then in the release, it mentions that you settled things with your pilots in terms of negotiations. But I believe there was something in the [site] about flight attendants. And they were negotiation process for contract [B]. I just wanted to know if there was an update on that or when we could expect to find a resolution of your talks with them.

Yes, regarding the flight attendants, the [obvious] is that the Supreme Court is analyzing the case and we expect the ruling to take place in the next months. According to federal court judgment, we cannot hire additional flight attendants until the Supreme Court rules about the subject.

We have 300 flight attendants under contract B, which is equivalent to 20% of the total labor force. They will remain in B until the Supreme Court decides.

But in the meantime, we are sitting with them on a permanent basis to see if we can reach an agreement before the Supreme Court ruling. And hopefully we are able to do that and make an announcement soon. If not, again, we will wait for that ruling to take place in the next months.

Okay, great. And then just one more -- appreciate the update on the capacity outlook and the cuts that you guys are making. And I just wanted to see if that was bearing fruit yet. Have you been seeing anything on the yield front? Have yields stabilized some in the domestic market if you look out towards the third quarter, or should we expect maybe some yield pressures to continue, given the sluggish demand and increased competitive capacity?

It's been improving. As we mentioned, the sequential improvement compared to the first quarter was there. We are seeing [fortunately] (inaudible) [also] and improvement versus previous months.

But we're cautious on it. We are being very disciplined. If you look, for example, again, at the increase in ASKs in the domestic market for us, was less than 3%. That is consistent with the growth rate of the economic activity in Mexico of 1.5%. And we will continue to play that role.

Again, the downward pressure in yields that we saw during the quarter was mainly explained by the additional capacity that we deployed in Europe and Asia due to the replacement of the 767 with the 787.

So, for example, in the case of Narita [community] we doubled capacity. We increased at 92% because it's not only a larger plane, but we added -- we moved from three to four flights per week.

So, we are cautiously optimistic going forward. But again, we will be monitoring things closely and if we need to take additional steps in, again, being even more disciplined in capacity, we will do it.

Okay, thanks so much.

We'll take our next question from Eduardo Couto with Morgan Stanley.

Hi and good morning, guys. Congratulations on the second quarter results.

I have two questions, the first one a little bit on the capacity side. Can you give an update on the Aeromexico Contigo product? Because we have seen some deceleration in terms of [capacity addition] in the domestic market from Aeromexico, especially in June. So, I was just wondering if the Company is still pushing the Aeromexico Contigo product or not. That's the first question.

Thanks, Eduardo. Yes, our strategy is to continue having the four 737s deployed in the Aeromexico Contigo product. We started this product in October.

And you know we know the behavior of the markets, well, in every market, but particularly in this one, is very seasonal. So, as we operate now for a full year, we are learning better how to manage capacity in the different markets.

So, we have the ability to use that product and deploy it in domestic Contigo markets and in the international Contigo markets, depending on the season.

So, for example, in the summer, we fly more intensively those domestic segments because it's the high season. But after the summer ends and going into September, October, probably we will deploy a little bit more of that capacity to our international Contigo destinations like Sacramento, like Fresno, like Ontario. But the idea is to keep these four 737s working.

What you will see in terms of capacity, as well, going forward even as we increase capacity in the second half of last year, the year-on-year comparisons will be affected by a higher base of 2013 compared to the first quarter.

So, again, not only ASKs, but passenger growth. Instead of seeing -- [even] we experienced 21%, 22% in one of the first months of the year. That will moderate to growth rates of high single digits or low double digits because of the high base comparison of last year.

Okay. But in the short-term, you're not adding more 737-800s to fly the Aeromexico Contigo domestically, right?

No, we will stay with the four.

Okay. And just a second question regarding the charter flights, right, it was a big jump on charter revenues given the World Cup. I just want to try to understand if the profitability of those charter flights is similar to normal flights of if it's higher or lower. And also now that the World Cup is over, if this capacity will return to the domestic market or to the international market? So, [where you're] going to deploy this capacity that was used on the charter flights?

Yes. Well, first regarding the performance and how the World Cup affected Aeromexico's P&L, the charter flights had a very positive operating margin. So, the impact was positive on that front.

However, our exposure to the World Cup had two components. First, [this] flight and secondly we had some packages that were part of this program that we needed to sell. Because of the Mexican national team was the last team to qualify and honestly expectations were not that positive going into the World Cup, we had difficulty in selling those packages.

So, I would say that the overall operations of the World Cup were [neutral] for Aeromexico. We didn't lose money but it wasn't either a positive business, no?

So, we were able with last minute efforts to recover lots of ground lost. But again, I would qualify this as neutral.

This additional capacity is returning both to the domestic and to the international market. So, for example, in June, domestic ASKs were actually -- the year-on-year growth was practically flat. And going forward, it will return to the levels that we saw before between 4% and 5%. So, that's for the year.

Domestic ASK growth in line with the outlook that Ricardo mentioned for the [overall system] will be a net expansion of around 75 in ASKs for the domestic market.

In the whole year, because of, again, the additional ASKs [and the] growth that we saw at the beginning of the year, in the se4cond half, this number obviously will be lower.

Okay, but you know the domestic market will -- the growth and capacity should return, as you said, to this 5% to 7%, 8% level, right?

Yes, in the second half of the year, around 4% to 5%. Again, but these aircraft were using our network. So, it's not that we are adding capacity. It was just a temporary replacement and we're putting those flights back in the market where we took them out.

So, we do not expect to see difficulty in the system of serving that capacity -- which is already there in July and it has worked well. So, it's already proven in the [way] we have a very flexible business model. So, actually, right away starting in the first week of July, all these aircraft are back into service in the itinerary.

And regarding the yields, that was a small improvement, right, as you mentioned in the second quarter versus the first quarter -- this improvement happened on both the domestic and in the international market? And do you see yields would continue to improve in the upcoming quarters as well, guys?

Yes, the improvement happened in both markets. Probably the improvement was slightly better in the domestic market because yields in international market, again, because of this additional capacity in the [way both] have suffered.

We expected that. I mean, again, adding so much capacity in this -- and it's not only us because also European, Asian and American carriers have expressed concerns about [ill] behavior in Europe and in Asia. So, we were affected by both fronts.

But going forward, the outlook that we're seeing is that the market was successful -- we're successful in placing that additional capacity. It has been [absorbed] well.

The 787 has received excellent customer reviews. Its reliability has been very positive. I mean, we're working [with one] to improve it. So, the outlook for the future is much more better in that front.

Okay, thank you guys.

Thank you.

We'll take our next question from Bernardo Velez with GBM.

Hi, good morning, guys. Thanks for taking my call. I was wondering if you could provide us with some more insight regarding competition, meaning how has Aeromexico pressured its competition by dropping yields? When can you expect your yield increases and how have yields and demand behaved in non-competing markets?

Thank you, Bernardo. Well, basically, now with the latest additional ASK growth of our competition, now practically all our markets in Mexico are now competed. Now it's either two -- in some cases, three.

However, how have we handled this? We have been able, in the face of this competition with a discipline growth in ASKs to increase our market share.

So, again, if you consider that, for example, in the quarter that ASK growth in the domestic market for us was less than 3% but passengers grew more than 10% -- so, our [factor loads] increased by 7 percentage points and our market share grew significantly, we have been able to do that by improving our product. [In one] case, in terms of frequencies, in terms of service.

But also, we've suffered downward pressure in yields. It is important to consider that our starting point in yields was much higher than our competition.

So, obviously the impact that we would face is stronger than what they did. But overall, in the markets that our two main competitors have entered, we have been successful in defending our market share.

So, we believe that for a business model to be sustainable, you need to have three elements. You need to have steady or increasing market shares, you need to have operating profit, and you need your operations to generate positive cash flow.

We are the only airline in Mexico that has those three components. Now we have, as the other airlines are public, as well, or they release public information now, you can make the [comps] and see the difference in the resilience of the business models.

Okay, perfect. That was pretty helpful.

Secondly, I would like to ask you some more color regarding the 13% decline in cost for ASK in maintenance. What part of this would you say is recurrent or how much of this comes from the new [MRO] and the [behavior] with [ALTA]?

Hi, Bernardo. Yes, I mean, there are several components, no, on that. As you mentioned, one important component is that we do now our major maintenance in the MRO with ALTA, which has provided more efficiency in terms of processes; that's part of it.

Another important part is that we started noticing in October of last year with the first 787s we started to [redeliver] the 767s that we had in our fleet. Those were the oldest aircraft in our fleet -- more than 20 years old. That has also helped us to reduce the maintenance costs.

And also we have been phasing out some of the Embraer 145s which were the second older aircraft that we had in our fleet, no?

So, there are several components, no, that are helping us to have a more efficient maintenance cost. We are also doing a lot of different changes in our processes internally. So, we believe that this is something that can be sustainable at least for the next few years.

Okay, perfect. Thank you so much.

(Inaudible), thank you.

We'll take our next question from Renato Salomone with Itau.

Hi, thanks for taking my question. The first one is regarding on-time performance. I remember that in late 2012, this was a major focus area for the Company on raising on-time performance to improve the perception of the product, mainly with corporate travelers. And you did a very good job back then.

Over the past few quarters, we saw on-time performance going down again and dipping below 80% in the second quarter. I assume it could be related to the connectivity in Mexico City. But I wanted to understand if that's a concern regarding the perception of the product and what's the strategy to bring this back up? Thank you.

Thank you, Renato. As you mentioned, we are not happy with the performance of our on-time performance in the quarter. It was mainly due to a labor dispute we had with our pilots in Aeromexico Connect.

So, as you clearly mentioned, our target is to have on-time 15 minute delay on arrivals -- less than 15 minutes close to 90% and we did to the low 80s.

We settled that labor dispute -- that was announced to the market three weeks ago where we were able to reach a very positive agreement with our pilot union in Connect. So, that's basically part of the past.

And what we are seeing in that agreement, again, three weeks ago, on-time performance is back again to the levels that we are [used]. In the summary, it's not close to 90% because it's affected by [higher] operations and by the weather. But right now, we are running on-time arrivals in less than 15 minutes in the mid-80s, which is 7, 8 percentage points better than what we were seeing in May and in April.

So, the outlook is very positive. And again, it's part of our product and we're working very hard to keep up with the best on-time performance in the industry in Mexico.

Okay, very clear. The other question is regarding the competition with Interjet on regional routes. If I'm not mistaken, they already have received eight of the Sukhoi jets and have 12 additional on order.

And when I look at the routes that they've been adding, all of them from Mexico City and pretty much on top of routes that are operated by Aeromexico connect. Are you seeing pressure on yields there? Is that one of the reasons why we're not seeing yields bouncing back as strongly as you expected for the domestic market?

Yes, we are seeing pressure on this markets that Interjet entered. It's natural. Those were markets that have relatively high yields in the domestic system. So, still, we are pretty [open] about the strategy. The strategy that we're doing is simply matching them.

I mean, we have the ability -- we work very, very hard to lower our cost base. So, in these markets where we have faced additional competition, again we have been able to keep up with our factor loads -- again, obviously with lower yields.

But we feel that it's the right strategy. We are the leader in the market and we will not allow them to get even closer to us.

We believe that we have a better product, no? Our regional aircraft, our Embraer 190 -- we think it's the best regional aircraft to have. So, the numbers that we're seeing -- our utilization is significantly higher.

We have a better product, again, with two classes of service. We have business, we have economy with a great [pitch]. Plus we have all the connectivity that not other airline has, plus our premier loyalty program.

So, again, competition is good. We face strong competition here, but that's really what makes you better.

And again, I want to stress that now that you compared our two main competitors in Mexico have released public figures, we are the only ones -- although we are not happy with the results; let me stress that; we know that we can do much better than this and we will do much better. We are the only airline in Mexico that has operating profit that generates cash flow in its operations and that has had the ability to increase its market share. So, the relative [comps] are very positive.

Thank you very much.

We'll take our next question from Marco Montanez with Vector.

Good morning, gentlemen. Thank you for the call.

A couple of questions, if I may. With respect to the growth of salaries, which was very significant compared to the previous year driven by the capacity increase, I know -- but I'm trying to understand the behavior for the rest of the year.

I mean, do you consider the amount observed during the second quarter could remain stable or do you expect additional increases in order to reach the Company's capacity goal?

And the second one -- regarding the ASKs [growth] target for the next year and the low [factor] you expect, could you share with us your expectations about it, please? Any color would be very helpful. Thank you.

Thank you, Marco. We have had increases in the first six months of the year in the labor cost of 4.6% and in the second quarter of 9%. However, if you look at the growth in ASKs, labor cost per ASK has been decreasing significantly, no? ASKs grew around 17% in the second quarter.

So, labor costs per ASK is actually having a very good trend. And we expect that to continue as we roll in with this more productive contract, no?

We always have nominal pressures, no, in labor costs because of [relation] and people have more years in the Company and that includes additional costs. But overall, given the capacity additions that we have had, we think this is one of the major items where we have seen important savings during this year, no?

And we expect that as we continue to grow and we are able to grow in these more productive contracts, this will continue to be the case.

Okay, great. And regarding the ASKs growth for the next year, do you have any targets?

Well, this is something that we are reviewing, certainly. But we want to keep growth consistent with economic growth, no? We estimate that in general, passenger traffic grows around two times economic growth in the domestic market. So, the target for next year will be to have growth in ASKs in the domestic market in line with that, no?

We are working on the program and probably a slightly higher growth in international markets. But overall, we think that the growth on next year will be in the single digits, no? It's something that is still under review. (Multiple speakers).

Okay, perfect. Okay, excellent. Very good color. Thank you Ricardo.

(Operator Instructions).

And we'll go next to Glenn Engel with Bank of America.

Good morning. You mentioned that you were going to be bringing your air fleet down to 121 from 123. What are the two extra planes that are going to be grounded?

Yes, hi, Glenn. We will be grounding one 767-200 and one 737-700, no? These will be redelivered a few months before our [arena] schedule, no, using the flexibility as we have in the labor contract. So, that's why we plan to end the year with two less operative aircraft.

And how many 145 --

[It will be] --

Do you plan on ending the year with?

Sorry?

How much E-145s do you plan on ending the year with?

That target has not been revised. So, we still expect to finish with 21 aircraft.

Okay. And is there any sign that anybody else, any of your other competitors are starting to scale back their capacity growth?

No, we haven't seen -- I mean, the public information that we have is what's available. Again, on average, they are growing in terms of ASKs between 15% and 20%.

Again, from a lower base where we are, no? So, in terms of absolute [data case] is lower than our growth.

And finally, can you give us an update on just how your mileage sales are doing? Your credit card program -- how that's [gained] any traction?

I think the program is doing quite well. In this quarter, Club Premier [has found] a very important retail partner as part of the program -- that is Soriana. It's one of the most important grocery chains in Mexico.

So, the [quality issue] program continues to improve and we think that this program still has a lot of opportunities to bring more loyalty to the Company and also to create additional value for Grupo Aeromexico overall, no?

But we remain now focused on improving the operation of the loyalty program and that's a target for the next couple of [quarters].

Thank you very much.

Thank you, Glenn.

And at this time, I would like to turn the conference back over to today's speakers for any additional or closing remarks.

Well, thank you everybody for attending this call. It was a pleasure to have you and we will continue working very hard to provide very positive results going forward. And we look forward to see you again in the next quarter conference call for the summer.

Thank you and have a good day.

That does conclude today's conference. We appreciate your participation. You may now disconnect.