Grupo Aeromexico SAB de CV (AERO) 2014 Q3 法說會逐字稿

Good afternoon and welcome to Grupo Aeromexico third 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.

Thank you, good afternoon ladies and gentlemen and thank you for joining us today. Andres Conesa, Grupo Aeromexico CEO and Ricardo Sanchez Baker, our Chief Financial Officer, will review key highlights of our third quarter 2014. I would like to turn the call to Andres. Please Andres.

Thank you Luz and good afternoon everyone and thanks for joining us on our third quarter conference call. As you know 2014 has been characterized by a challenging environment due to reduced economic activity in Mexico and the significant ongoing capacity expansion within the Mexican airline industry. However in recent months we have begun to see some signs of improvement. Let me share with you some examples.

Beginning with the Mexican economy. June and July IGAE -- which is the monthly indicator of economic activity -- results show preliminary indications of positive momentum in economic activity. The base of recovery has broken away from the manufacturing sector into other sectors such as construction.

The economy has grown year on year during the June to August period 2.2% versus an average rate of growth of 1.5% during the first five months of this year. Economic growth is still below our initial expectations but recent figures suggest going towards a slight recovery.

Also in recent months we have also observed a more rational capacity expansion [offsetting] the industry, especially in the domestic market.

Domestic market ASK growth has moderated to 6.9% in the June to August period as compared to 10% growth during the first five months of this year.

In September of this year, Grupo Aeromexico rescue flights supported those who were affected by Hurricane Odile in the Baja Peninsula. The net effect, which includes increased number of rescue operations during this period as well as cancellations as compared to the original program resulted in approximately 55 cancelled flights, mainly to Los Cabos. This represented 0.6% of the domestic capacity for the month. Ricardo will comment with more detail on our financial results.

So I would like to take this opportunity to briefly discuss some factors that influence our third quarter results as we continue to moderate Aeromexico's ASK growth. In the domestic market, our capacity in terms of ASK increased by a conservative 3.6% during the quarter. This growth was focused on two key strategic initiatives.

First, the strengthening of our Mexico City hub with aircraft (inaudible) and second the launch of our Monterrey hub. We are confident that our focus on key domestic markets is having positive results.

Aeromexico's domestic market share increased by 1.5 percentage points reaching 36.1% of the total domestic passenger share in the eight months of the year. More importantly we have significant improvements in domestic yield, resulting in a moderate decrease of only 1.5% in the third quarter as compared to the previous year and close to a flat growth in terms of passenger revenue per ASK in this market.

Meanwhile, we're seeing positive passenger revenue per ASK growth in the most important business markets in which we are investing.

On Aeromexico's international side, ASK increased by 18.2% during the third quarter as we continue to strengthen our premium wide body product offering. Over the past year we have incorporated five new Dreamliners 787-8 and this has resulted in considerable capacity growth in certain markets, particularly in Europe and Asia due to the additional seats that these aircrafts provide.

As expected, this increase in capacity has generated some short-term price driven deals. As we have explained before, each 787-8 has 42% more seats than the 767-200 it is replacing. Yields have been gradually improving as this additional capacity is observed and our new product is known by the market. We expect this trend to continue in 2015.

Overall, we have continued to execute our revenue management strategy focusing on optimizing passenger revenue per ASK. We have seen important sequential improvements in unit revenues. During the third quarter our PRASK decreased 3.6%, a figure significantly better than the 8.1% decline recorded in the second quarter of the year.

We will continue to manage capacity in a disciplined way. Overall, we expect that in the fourth quarter, capacity will increase between 5% to 6% as compared to the same period of 2013. Specifically we expect capacity to remain flattish in the domestic market, with all growth coming from international capacity.

Therefore we anticipate closing 2014 with approximately 12% ASK growth, which is in line with the lower range of our guidance at the beginning of the year. With respect to 2015, we will continue to be conservative in our capacity growth and expect a lower growth rate than this year.

We are still fine tuning our plan for next year based on the market environment. We expect a higher growth rate in international markets, but this is mainly due to a continued replacement of the 767s with the 787-8s. In the domestic market our growth will come only from aircraft upgauging.

I would like now to briefly update you on some of this quarter's events, which were relevant to Grupo Aeromexico and to the Mexican aviation industry.

We continue to strengthen our positon at our main hub in Mexico City. In November we expect to move from our current eight banks to a 12 connecting bank structure. This will allow us to continue to capitalize on our uniquely strong positon in Mexico City's slot constrained airport.

We continue to make more efficient use of slots by replacing the ERJ-145s with larger and more efficient aircraft. This (inaudible) has resulted in an increase of 4 points in connecting passengers at Mexico City airport, to reach to date at least 26% of passengers connecting in from Aeromexico's networks. We are convinced that we have significant opportunities to continue increasing our network connectivity of Mexico City.

Also during the third quarter we introduced our new destination from Mexico City (inaudible) to Managua Nicaragua, to further strengthen Aeromexico's presence in Central America and also to increase the north to south connectivity.

Our new Aeropuente shuttle, which moves between Guadalajara, Mexico City and Monterrey, continues to consolidate and strengthen our position in those three markets. As we mentioned last quarter we remain committed to developing our Monterrey hub for the long-term offering a better product for our business passengers and increasing connectivity with our [fourth] connecting bank structure to more than 23 destinations in the domestic and international markets.

A few weeks ago we announced a new route between Torreon and Monterrey and new service -- international service between Monterrey and New York City and between Monterrey and Houston. We will continue to consolidate our position in this important city based on our expectations for economic growth ahead of what we believe will be strong business passenger demand driven by the energy reforms.

As a result of our efforts connecting passengers in Monterrey hub have doubled year to date. Our [neighbor's] strategies resulted in an increase in the connectivity of the total network from 26% of passengers last year to 30% year to date.

As in the case of our Mexico City hub, we believe that we have significant opportunities to continue increasing our overall network connectivity.

Last but not least we remain fully committed to keeping our costs contained. We have a strong pipeline of cost reduction initiatives that will continue to make our airline more efficient. We had some pressure on unit costs this quarter coming from exchange rate depreciation and a moderation in capacity growth, but we feel we're able to achieve the seventh consecutive quarter with year-on-year decline in costs per ASK.

On the labor side, we continue to take the right steps in building long-term relationships with our unions. In September we reached an agreement with our flight attendants' unions for the new flight attendants that will enter at our mainline carrier.

The result of this agreement is competitive labor conditions that encourage productivity. This agreement also ends all legal disputes that we had between the two parties. In addition, we also renewed our agreement for the next four years with our pilots and ground staff unions for our mainline carrier, which assures both productivity and certainty for the economic conditions in place.

We are confident that this renewed spirit of collaboration can translate into other productivity initiatives, which combined with our cost initiatives will help drive stronger results in the future.

Finally, I would like to make some comments about an important announcement made during this quarter for the Mexican aviation industry. A few weeks ago Mexican operators announced the project for the new Mexico City airport which will be built between the next four to six years in different stages.

The brief for the new airport is based on a state of the art facility that will promote growth and operational efficiency. Having best-in-class infrastructure will allow Aeromexico to improve its connecting processes, thereby creating a much stronger network.

The opportunities that are open with this new project are significant. We are working very closely with the operators of this project to ensure that this transformation can help Mexico to transform itself into an international logistic hub.

In the meantime, we will continue to operate in the existing airport, which will also be positive for Aeromexico. We will continue to grow by upgauging our fleet, an opportunity that represents a unique competitive advantage for us.

We estimate that the updating opportunities can allow us to grow more than 50% in seat capacity in the next five years. We are confident that the new airport represents a unique two-sided opportunity. On the one side our fleet flexibility will allow us to capitalize on short to medium term opportunities for growth in our main hub.

On the other side, a new state of the art airport will give us the opportunity to operate from the best-in-class infrastructure and processes, thus enhancing our growth opportunities, and fully capitalizing on the power of our network. We are very much looking forward to working with our [partners] on this project.

Looking to the last three months of 2014, while it has been a challenging environment in Mexico, it also has been an important year for Aeromexico as we continue to take the right steps in executing our well defined strategy.

We will continue to invest in e-commerce by developing new information technology systems to improve service for our passengers and expanding our opportunities to drive additional ancillary revenues as we increase our distribution of our current [goals] and develop new ones. [Grow our] direct channels including a more developed Manage My Booking tool, which will be one of the foundations of this initiative.

Also, we will continue to advance in important cost and productivity initiatives that will guarantee further efficiencies in our cost per ASK. We will continue to strengthen Aeromexico's position as Mexico's solid premium carrier.

Before handing the call to Ricardo, let me underscore that this is the eighteenth consecutive quarter with positive EBIT and that we will continue to take the necessary steps to guarantee that this trend continues into the future.

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 briefly review some of this quarter financial highlights.

Beginning with our top line, we achieved MXN11.2 billion in revenues for the third quarter of 2014, an amount equivalent to 6.9% growth year over year.

Third quarter passenger revenue international flights represented 50.5% (sic - see quarterly report, "52%") of passenger revenues, while domestic passenger revenue represented 49.5% (sic - see quarterly report, "48%") of passenger revenue. This works in favor of the natural hedge we are building against (inaudible).

Cargo revenues increased 29.8% which represents the fourth consecutive quarter with a significant year-on-year revenue increase in cargo. We believe that our commercial strategies combined with the 787s extra cargo capacity and overall market expansion will continue to positively impact Aeromexico's cargo results.

Charter revenues reached MXN194 million, a figure that represents 27.6% increase year on year and this increase was largely due to the positive impact of additional flights related to the FIFA World Cup in Brazil operating in July.

During the third quarter of 2014, all our ancillary revenues decreased 56.2% as compared to the same period of last year, mainly due to a challenging year-on-year comparison.

This is because in the third quarter of 2013 we reported a considerable amount of non-required revenues from unused tickets, due to fluctuations in passenger consumption patterns. Excluding this effect, third quarter overall total revenues would have increased 8.7% compared with 6.9% that we reported.

On the expenditure side, our cost reduction strategy has remained on track and has continued to improve our cost structure. Third quarter of 2014 total cost per ASK in pesos decreased 1.5% year on year while our CASK excluding fuel decreased 0.1% year on year. We were able to achieve these reductions despite a Mexican peso depreciation of 1.8% during the quarter and the fact that Aeromexico's capacity increased at a moderate rate.

Our third quarter total cost per ASK expressed in dollars decreased by 3.3% year on year, while our growth in dollars excluding fuel decreased by 1.7% It is important to note that we have been conservative in managing our capacity. Despite the peak season, third quarter ASK increased by 12.4%, well below the 17% increase reported last quarter and the 14.6% increase reported for the first six months of the year.

In the domestic market our ASKs increased at a moderate rate of 3.6% in the third quarter, which is in line with our conservative growth of 2.3% in the previous quarter and well below the 8% growth rate that we reported in the first quarter of the year.

We are convinced that while this more conservative growth in capacity reduced our opportunities to further improve our unit cost, capacity discipline has been conducive to improving revenue trends and has more potential to improve margins going forward.

We will continue to implement a strong pipeline of efficiency and cost reduction initiatives. For example we will continue to upgauge our fleet, which will allow us to further improve our unit cost as more efficient aircraft are introduced into our fleet. These more efficient aircraft will also improve our overall product and customer offering, providing potential opportunities for better revenue trends.

We will remain on track with the installation of our Split Scimitar Winglets for 737-800 aircraft which will produce approximately 1.5% savings in fuel consumption. We expect to close the year with these new winglets installed in our entire 737-800 fleet.

As Andres mentioned, this quarter we reached three important agreements with our mainline carriers -- unions, pilots, ground personnel and flight attendants. This achievement represents an important initiative for Aeromexico in terms of labor productivity.

During the quarter labor costs per ASK decreased 4.7% compared to the third quarter of 2013. During the first nine months of the year labor costs per CASK decreased 7.4% compared to the same period 2013.

We will continue to work on improving our cost per ASK structure in order to consolidate our position as a full service carrier with the lowest cost per ASK in the [Americas].

Now turning to the bottom line, third quarter EBITDAR reached MXN2.14 billion with a 19.1% margin. Our PLM subsidiary paid Grupo Aeromexico MXN48.3 million in capital [stock] reimbursement during this quarter. Therefore adjusted EBITDAR reached MXN2.19 million with a 19.5% margin.

Adjusted EBITDAR metric provides more detail and color on Aeromexico's capacity to generate cash flow due to the fact that it captures recurrent [dealings for] capital stock reimbursement from subsidiaries that are [accounted] under the equity method.

Our operating profit before non-operating revenue and expenses reached MXN522 million with a 4.7% margin, while our net profit amounted to MXN201 million with a 1.8% margin.

With this quarter, as Andres mentioned, we have achieved 18 consecutive quarters of positive EBIT margins.

Regarding our risk hedging strategy to reduce our exposure to fluctuations in the price of international oil and fuel, we have a [initiated] a policy to hedge around 50% of our expected consumption of fuel for the next 12 months on a rolling basis.

It is important to note that Aeromexico uses call and call spread options in its hedging program so the maximum load that the Company can report is limited to the value of the premiums paid for said options.

This strategy allows us to benefit by the lower fuel prices that we have been seeing in the market in recent weeks. During the third quarter however, we had a negative impact of MXN85 million due to mark to market variations of this portfolio.

Aeromexico recorded a cash balance of MXN4 billion at the end of the third quarter. The evolution of our cash finance with respect to the previous quarter reflects many additional factors as well as our investment program in fleet.

During the quarter, operations before income tax generated a cash flow of MXN681 million. However as a result of working capital fluctuations, net generation of cash resources derived from operating activities required a net amount of resources of MXN548 million.

In particular our air traffic liability decreased by MXN565 million with respect to the end of June. This reduction in air traffic liability reflected both seasonal patterns as group passengers tend to diminish when the peak season ends, and the Company's policy of maintaining a conservative advance sales profile to support the strengthening tariff environment.

We expect a recovery in [ATL] levels by the end of the year as the yield environment has continued to improve.

This quarter we also made the important steps related to our fleet investment program. By the end of September we completed PDP payments for two 787s that will be delivered in December of this year and January of next year. This was reflected in the balance sheet as an increase in short-term financing and increase in the guaranty deposit line.

Whilst we received the aircraft and the long-term financing has been established we will reclassify this transaction as an increase in long-term financial and an increase in fixed (inaudible) with a minimal impact in our overall financial debt and a reduction of our short-term (inaudible) to those levels that we had by the end of the previous quarter.

As it stands today, our balance sheet reflects close to 75% of the value of these two aircraft and these aircraft will be producing revenues in the first quarter of 2015.

At the end of the quarter our financial debt measure in pesos was also affected by [interest] rate depreciation. Our debt balance in pesos increased by MXN166 million as compared to the December of 2013 and increased by MXN204 million as compared to [June] just due to exchange rate (inaudible) pressures.

As Andres mentioned, capacity (inaudible) is the cornerstone of our plans and we therefore expect (inaudible) production to continue to accelerate in the last quarter of 2014, particularly in the domestic sector where we expect ASK to remain flattish with respect to the same period of last year.

We therefore expect total ASK growth for the fourth quarter within 5% and 6% with overall income from international ASKs.

For the full year, as Andres mentioned, we are expecting total ASK growth rate at around 12% at the lower part of our guidance range.

With this I would like to conclude my remarks. Thank you once again for joining us on today's call and now we would like to take any questions that you may have. Thank you.

(Operator Instructions). As a reminder, this call is being recorded (Operator Instructions).

We'll take our first question from Michael Linenberg from Deutsche Bank.

Hello gentlemen it's actually [Reggie Tower] filling in for Mike. First, I appreciate your commentary about the greater capacity discipline in the domestic market and in particular moves by Aeromexico to [earn] that capacity growth, but I was just wondering if you're starting to see the benefits of that in the pricing environment yet. I know you added some commentary in the press release that said you are seeing a more favorable pricing environment, but I was hoping you could elaborate.

Hi [Reggie] how are you. Yes we are seeing improvements in passenger revenue per ASK, even during the quarter. The numbers that we have for September were significantly better than the ones that we have for July and August. Also, the outlook for the fourth quarter looks better than the third.

As we mentioned in the call, the decline year on year in the third quarter of revenue per ASK was significantly lower than in the second quarter, but still it's in negative territory. Again with the actions that we're taking hopefully (inaudible) -- we are convinced in terms of passenger revenue per ASK it will turn into the black in the fourth quarter.

Okay that's great and then taking that one step further, on the margin, do you expect maybe the margin decline to also improve in the fourth quarter?

We're seeing -- as you know, the gap between -- when we do the year-on-year comparisons, the gap in the third quarter compared to last year was significantly lower than the gap that we had in the second and in the first quarter. So we are seeing improvements. The trend is clearly positive.

We expect, again, the gap between the 4Q of this year versus the 4Q of last year will continue. Today I do not have information whether it will be better margins compared to last year, because I again we are just starting the quarter, we do not have enough information, but clearly the trend that we are seeing in every quarter is positive.

Okay that's very helpful. Then regarding international growth opportunities, I was curious around your thoughts around Brazil right now. It looks like you only serve Rio and Sao Paulo currently out of Mexico City, but I believe [CAM] is initiating service to Cancun from Sao Paulo before the end of the year. I was curious first how your current flights to Brazil are booking up post World Cup?

Second, do you see a greater opportunity to expand service at a secondary Mexican airport to Brazil or are you concerned about the general macro outlook in that market following the results of the election particularly?

We will -- I mean our flights to Sao Paulo and Rio are doing okay. I mean Rio we just started and it's picking up, because we started at the end of June of this year.

We used to do some -- also some operations between Cancun and Brazil but those were mainly charter operations in the previous years. We do not think that we are going to do that this year and we prefer to connect passengers in Mexico City.

We are staying with the outlook. We do not foresee additional capacity between Mexico or any other point in Mexico and any other city in Brazil, but certainly we will keep the service that we have.

Again, as we receive the 787s, replacing the 767s, the 787 will fly, eventually, to Rio. Probably the next one -- we have five, again, already flying. We will receive two more -- one in December and one in January which, again, still we have service with 76 to Santiago de Chile, to Buenos Aires, to Rio. We expect completely to replace those planes with the 787s next year. So in that sense by the end of next year probably we will see some capacity increase in Rio, but due to the fact that we are swapping aircraft, not because of new frequencies per week or additional frequencies per week.

Alright. Thank you.

We will move to our next question from Bernardo Velez with Grupo Bursatil Mexicano.

Hi, good morning guys. Thanks for taking the time for the call. I was wondering if you could walk us through your pricing strategy for the next -- the near future. Meaning what should happen with demand and yields if consumption or consumption environment in Mexico continues to be slow or somewhat depressed?

Hi Bernardo, yes. Well, as we mentioned briefly during the call but I want to emphasize that. What we're seeing the outlook not only for the 4Q but for 2015 we will expand less than in 2014.

We are working on there an assumption of a pickup in economic activity for 2015. We think that it will happen -- it will not -- we are not being bullish in the sense that our growth will double next year versus this year. We are working with a consensus of growth of say between 3% and 3.5%, which is slightly higher than growth this year, which will be, in our expectation, between 2% and 2.5%. So even with a slight pickup in economic activity, we will be expanding less in 2015. So that bodes well for yields and revenue per ASK for next year compared to 2014.

Moreover, this growth that we will see this year will be mainly -- next year, sorry -- will be mainly allocated to the international market as we replace, again, the 76s with the 787s. So we do not expect a significant expansion in the domestic market, again, because we are not seeing a sound expansion of economic activity in Mexico.

Okay, that's perfect. So if you guys are -- continue to expand with large increases in the international front, won't that also hamper yields due to the business [mix]?

Well as -- again, this year we've seen pressure on yields on the international market but particularly on the wide bodies. The expansion that we've undertaken in markets in the continent with our 737 fleet particularly in the US, Central and South America, those have been performing relatively well. However, as we expand in some markets like Japan, for example, we grew 90% in terms of seats because we upgauged the plane and we [are at one] frequency in the [week]. So we expected to have those pressures on yields again and as the market knows our products, that's the market that serves this capacity, we are seeing an improvement in yields in that wide body market and we expect that trend to continue going into 2015.

Okay that's perfect. Thanks so much for your help Andres and Ricardo.

Thank you.

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

Yes, hi good morning guys. I have a question regarding cash disbursement. Your leverage went up quite a lot in the third Q and you mentioned the PDP payments. So can you comment how much more PDPs do you have for 2015 and what can we expect in terms of leverage or even cash position for the Company going forward?

Yes, thank you Eduardo. (Technical difficulty) mentioned (inaudible) quarter [a growth] and reflected mainly two parts. One, seasonal factors that reflected a working capital fluctuation. So also the operations generated positive cash flow of MXN681 million, no, and yet working capital fluctuations translated into net cash flow coming from operating activities in the negative side of around MXN548 million. Mainly as reflected, as I mentioned on the [ATL] side.

The other important point, as you mentioned, is that we -- these substantial PDP payments in particular, and this reflects to both what happened to cash and what happened to financial debt. We did a transaction where we basically completed all the PDP payments associated with the 787s that will be received in 2014 -- by the end of 2014 and early 2015 with the 787s. As you know, PDP payments reflect a list price of the aircraft. We paid PDP payments as a percentage of the list price, not of the net price.

So overall what this implies is that in our balance sheet we already have a reflected -- a more than 70% -- close to 75% of the value of the aircraft but we have not yet received the aircraft, the aircraft will come in late December and early January. But we will see once these transactions are executed is that the structure of financing will change and that most of this debt will be reclassified as long-term financial debt. You also saw in the balance sheet a big important increase in guaranty deposits that will be then applied as a fixed asset.

For next year certainly the PDP pressure will be much lower. We have an aircraft on order, the 787-9s, but we have been doing payments and compared to the pressures that we had this year it would be probably half of what we have seen this year in terms of PDPs.

So I think it's important to stress that what happened in this quarter reflects basically the two aircraft that will come by the end of the next quarter and we already have those in our balance sheet. That's basically there.

Let me also complement as well what Ricardo's just mentioned. If you look at the cash generated from operations, as I mentioned, what, MXN600 million in the third Q. If you take the first nine months of the year it's close to MXN1500 million, close to $120 million. So the operation is generating cash.

Again, we are investing into the future by acquiring those -- these two planes. We have all of them in our balance sheet but it has -- the impact -- those revenues are not yet reflected in the EBIT numbers. You will see those in 2015. So we believe it's the best investment that we can make because also in the conditions that we're bringing those aircraft are significantly better than leasing them in the market.

That's very clear guys. Just another question regarding future plans, the fleet plans. When we look at the Mexican carriers, now they -- all of them, the short term, they are saying that they are conservative, that they are not adding a lot of capacity but the aircraft orders and future growth in terms of fleet plans, they look quite aggressive. So what are your guys' views on that?

Do you think we -- is there a risk of an over capacity maybe starting in 2016 or 2017? Because, you know, the short-term behavior [and] the more conservative capacity short term doesn't match very well with these aggressive orders. So if you may comment a little bit on your fleet order and your fleet plans and also how do you see the industry behaving going forward?

Yes. We are -- we take care of the risks. We are very disciplined. One of the main risks that any airline faces is those risks associated with the economic cycle. So yes, indeed, for example in our case we have this large order of MAXs, the 787-9.

Today we have 125 planes. If you look in the long term we can be as large as 225 planes but we can remain the same size because we have staggered lease contracts that if we do not see that the market is there, we will simply use those planes to replace -- return the ones that we have leased versus the more efficient ones that we have on order and it will be a combination of us buying those planes, doing some sale and leaseback, some type of third party financing.

So we're not thinking of buying the 100 planes. Again, it will be a mix, and not necessarily growing in 100 planes but maybe some of them will be replacing. Here we -- there are some things -- even if the Mexican economy recovers, which we expect that to happen in the medium term, there is still the bottleneck of infrastructure in Mexico City. Sorry, because the new airport will not be ready, not until the next five to six years. So any additional capacity that us or anybody else brings needs to go outside Mexico City. There yields are lower, opportunities are also less important than the ones that we have here.

We particularly think that the best way to proceed is to upgauge on the [currency] because we have lots of opportunities on that front and replace -- and use those slots that we have in Mexico City with larger and more efficient planes, and use those smaller aircraft that we have to feed the [force] that we're building outside Mexico City. This is what we're doing.

We see, again, more discipline compared to the beginning of this year or the end of last year. Hopefully this prevails because clearly it's not sustainable in any country to have capacity or industry growth rates of 15% in an economy that is growing 3%.

When do you expect to start to get the new narrow bodies guys, the MAX?

Right at the end of 2017, early 2018.

Okay.

[We're trying to work] (technical difficulty).

Okay, thank you.

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

Hello gentlemen. An industry weekly publication indicated that Mexico and the US could be just a few weeks from signing an agreement that could eliminate most cross border flying restrictions between both markets, being just short of an open skies agreement. Can you share your thoughts on this and if you have any further details on this potential agreement?

In line with Eduardo's question, could we see an even higher capacity growth from both the Mexican and US carriers leading to a supply demand imbalance in this cross border market?

Hi Renato, thanks for the question. Yes, let me today -- I think it's important to emphasize that Mexico has one of the most open skies in the world. We have -- basically with the European Union it's an open skies agreement for practical purposes. We have also lots of freedom to fly Central and South America.

With the US even though there is still today a limited number of airlines that can do services between the two countries in given paired cities, because of a consolidation that has happened both in the US and Mexico there are -- even with today's arrangement there are many spaces that are yet not serviced. If you take all the pair of cities between Mexico and the US only a few, maybe three or four, are already covered from both sides.

So that means that when you open more the market and you have unlimited number of airlines that can service between any two points the impact will be felt probably on these cities that to date the restriction is binding because in the others, there isn't. We support this policy in the sense that having also an open skies framework will allow you to collaborate in other areas, having, for example, asking for antitrust immunity and the possibility of strengthening the partnership in this case with our main partner and also shareholder and where we collaborate in many other areas, which is Delta. So we look forward to that. We think that it will be positive for the two countries and it will be positive both for us and for our partner in the US, for Delta.

Thank you. Just to clarify, so the negotiations are, indeed, advanced?

Yes. I mean as you know the airlines do not -- they are not in charge of the negotiations [of the two] governments. We are invited and there have been in the past year probably three or four bilateral meetings and these meetings continue.

There is a policy of this administration, which we support, to integrate more and more with the US. So this bodes well into the right step. But I mean it has to be done and similar to what the US has signed with other countries like Canada, like Colombia, like Japan, where there are open skies discussions in the context of granting antitrust immunity with a possibility of any carrier, because this not only means Delta and [Aero] but anybody can do it and strengthen the partnerships through JVs. [They are] good and that has proven to be efficient in other parts of the world.

Thank you.

We'll move to our next question from [Francisco Rodriguez] with [GBM Funds].

Good morning Andres and Ricardo, thank you for the call. To better understand how will your lease expenses develop, could you share your target for fleet ownership? You've already mentioned that you will dis-incorporate some aircraft and incorporate new ones, what percentage of leased versus owned are you targeting? Thank you.

Yes, thank you Francisco. Well, it's a very long-term process. We have started from a portfolio of aircraft where we owned close to zero in terms of the aircraft in our portfolio. Gradually in the last two years we have been acquiring assets. We see good opportunities to continue doing that because we have been able to obtain very attractive financing. Just to give you a couple of examples, no, or one example, we have been able to secure the funding at fixed rate interest rates in dollars, around 2.5% for the next 12 years.

So if you add to that the depreciation of the aircraft, the ownership cost is around or close to between 5.5% and 6%. So with that the ownership cost is pretty much half of what it will be under a leasing arrangement. A lessor for a new aircraft it tries to charge you very close to 1% of the value of the asset per month, so that implies an interest rate of close to 12%.

So by doing this we have been able to decrease ownership costs. Now certainly we know that we cannot move to 100% or the process has to be gradual. Our target in the very long term, which is many years [from now], will be to have a portfolio roughly of 50/50 between owned and leased aircraft. It will allow us to reduce on the one side this ownership cost but on the other side we want to keep the flexibility of having lease contracts expiring every year that, as Andres mentioned, for us is very important to manage capacity and to make sure that we can respond quickly to changes in the environment.

So I think that in the next few years what you will see is that gradually we move [upwards] from the position that we have, currently around 25% of the value of the fleet that's owned. But it will take many years to reach this 50/50. The idea is to keep a balanced portfolio between owned and leased aircrafts.

Okay, thank you very much.

At this time I will turn the call back to the speakers for any additional or closing remarks.

Well, thank you very much for joining the call. We look forward to seeing you in the 4Q conference call in a couple of months. Again, any questions please direct to Luz and we will happily answer anything that was left on the table. Thank you very much and I look forward to seeing you soon.

That does conclude today's conference, thank you for your participation.