Copa Holdings SA (CPA) 2006 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Copa Holdings, second quarter 2006 earnings release conference call. During the presentation, all participants will be on a listen only mode. Afterwards we will conduct a question and answer session. [OPERATOR INSTRUCTIONS]. As a reminder this call is being webcast and recorded, Wednesday, August 16, 2006.

Now, I will turn the conference call over to Joseph Putaturo, Director of Investor Relations. Sir, you may begin.

Thank you very much, Sheila, and welcome everyone to our second quarter earnings call. Joining us today, in Panama are Pedro Heilbron, our Chief Executive Officer and Victor Vial, our Chief Financial Officer.

As in previous calls, first Pedro will open up with an overview of the quarter, followed by Victor, who will discuss second quarter '06 results. Immediately following we will open up the call for questions.

We've allocated approximately 20 minutes for management comments and 25 minutes for questions from analysts. We kindly ask you to limit yourself to one question and a brief follow up, so we can accommodate most questions.

Today we will be assessing non-GAAP financial measures. Direct reconciliation of non-GAAP and GAAP financial measures can be located in the Investor Relations section of Copa Airlines website.

In addition, our discussion will contain forward looking statements not limited to historical facts that reflect the Company's current beliefs, expectations, or intentions regarding future events. All forward looking statements involve risk and uncertainties that could cause actual results to differ materially. For example, such risk and uncertainties see the risk factors set forward in the Company's [F1] filing.

And now I'd like to turn the call over the Pedro Heilbron, our Chief Executive Officer.

Thanks Jo. Good morning and thank you all for joining us today. I would like to start this call, again, by thanking all of our people at Copa for their efforts in making the second quarter another great quarter for Copa Holdings.

Copa Holdings again delivered very strong earnings, as a result of healthy revenue growth driven by increased capacity, strong load factors and yields, as well as our continued commitment to strict cost controls.

With the drive of our highly motivated work force, widely recognized for its commitment to customer service and operational excellence, we continued to execute both on the operational and financial front. This means we continue to deliver a world-class product, built upon the most complete intra-Latin American network, outstanding on-time performance, one of the youngest fleets in the world, and best in class customer service.

For the quarter Copa Holdings reported a net income of $22.9m and diluted earnings per share of $0.53. This represented earnings per share growth of 51.1% over the second quarter '05. Among the main highlights for the quarter were a 29% year over year increase in available seat miles, a 29.9% year over year increase in traffic measured in revenue passenger miles. A strong 69.7% consolidated load factor, in what is considered Copa Holdings' low season quarter. For the quarter Copa Airlines load factor increased by 0.9 percentage point to 76%, again during our low season quarter.

Revenue per available seat mile increased 7.7% year over year to $0.117. Yields increased 1.2% over first quarter '06, marking the fifth consecutive quarter of yield growth. The year over year CASM, excluding fuel, remains unchanged at $0.67 versus the second quarter '05.

Consolidated operating margin for the second quarter was an outstanding 14.9%, increasing 0.1 percentage point year over year. So, we're pleased to say our margins remain among the top in the industry.

Copa Airlines reported an on time performance of 91.9% and a flight completion factor of 99.7% for the second quarter, consistently placing us among the best in the industry.

On May 11 the Board of Directors of Copa Holdings declared an annual dividend of $0.19 per share. This dividend, payable to stockholders of record as of May 31, was paid on June 15, '06.

In June Copa Airlines continued its fleet expansion by taking delivery of three aircraft, one Boeing 737-700 and two Embraer 190s, as well as an additional Boeing 737-700 in July. Copa Airlines will receive two additional Embraer 190 aircraft during the month of October to end the year with a fleet of 30 aircraft.

We recently announced two Embraer 190 leases with GECAS, which will enter our AeroRepublica’s fleet in 2007. So, AeroRepublica has firm orders to receive seven new Embraer 190s, four in the fourth quarter of this year and another three in '07.

Our Tocumen airport in Panama where Copa Airlines [top] of the America [state] is finalizing its $70m expansion project and now has all of its 22 gates functional. So now, our world class product is complemented and enhanced even more by having one of the best and most attractive airports in our region.

During the month of July and August Copa Airlines continued its route network expansion by adding service to five new destinations Manaus, Brazil and Santiago de los Caballeros, Dominican Republic on July 15. Maracaibo, Venezuela and San Pedro Sula, Honduras on July 24. And just yesterday, we successfully launched service to Montavideo, Uruguay. And I'm glad to report that overall, the new routes are performing better than we expected.

We see that the more our hub expands and benefits from Copa's competitive advantages, the easier it’s becoming to add new markets to our network, even more than we can leverage from the flexibility of our growing Boeing NG and Embraer 190 fleet. Another positive development is that on August 3, AeroRepublica began a daily service from Bogota to Copa’s hub in Panama.

In general terms, our second quarter results were driven by continued economic growth in Panama and Latin America, continued strength in intra-regional business trade and tourism, demand stimulation by initiating service and increasing frequencies to destinations that were previously under served for intra-Latin America travel, and the overall strength of our top of the Americas in Panama and the growing preference of our passengers.

Looking forward to the remainder of '06, Copa Airlines continues to execution its operational plan through the recent incorporation of four aircraft into its fleet, and the addition of two more in the fourth quarter of '06.

For the coming years, Copa has the fleet plan in place to continue to drive growth and strengthen its competitive position in the region. With this fleet expansion, Copa has been able to successfully continue its route network expansion by initiating service to five new destinations in 2006. These destinations strengthen and enhance Copa Airlines network, by increasing the total number of destinations served from the top of the Americas in Panama City to 35 cities in 21 countries in North, South, Central America and the Caribbean.

Our Columbian subsidiary, AeroRepublica, recorded a net loss of $7.1m for the quarter. The second quarter is traditionally the lowest season their market and was further compounded by high fuel prices, a weaker Columbian peso, and excessive capacity. That said, AeroRepublica continues with its transition plan. And it's in the process of executing several initiatives, which include amongst others, the modernization of its fleet. As mentioned before, AeroRepublica has firm orders for seven Embraer 190 aircraft, to be delivered towards the end of '06, and three in 2007. These aircraft will better balance capacity and demand for enhancing the airline's operational performance and commercial appeal.

AeroRepublica has also concluded a branding analysis with the help of outside consultants. So, a new image will soon be implemented to leverage our corporate image and commercial appeal. As you may know, another important imitative was the introduction of OnePass, Continental's award winning Frequent Flyer Program, which was launched by AeroRepublica in March 2006. At the end of June, OnePass has subscribed more than 42,000 new members in Colombia versus a little above 8,000 in the same period during 2005.

On the operational front, several initiatives have been implemented, which have resulted in a significant improvement in AeroRepublica's on time performance, which has increased from 68.6% of on time arrivals in the second quarter '05 to 83% in the second quarter '06.

On the commercial front, Copa and AeroRepublica's sales forces are executing a sales initiative program, which includes joint incentive plans, joint [inaudible], promotions with wholesalers, and agreements with corporate customers among others.

Additionally, AeroRepublica outsourced call center operations began in July. This call center centralizes and eliminates inefficiencies of the previous in-house call centers, as well as significantly elevating standards of customer service. In its first week of operation, the call center received 30% more calls than initially expected. Also, to optimize capacity, we have contracted outside consultants who are currently working with us in the development of an optimized schedule for AeroRepublica's operation.

Going forward, this broad set of initiatives are designed to maintain and improve the competitive position and financial strength of both Copa Airlines and AeroRepublica, with a concerted effort to leverage our Copa Airlines know-how and synergy opportunities between both airlines.

So in short, we have had a great quarter, both operationally and financially. Our Copa segment continues to strengthen as the preferred connecting point for intra-Latin America travel. And we believe it will continue to yield strong results.

As a matter of fact, on August 10, Copa Holdings reported a consolidated load factor of 78.2% for the month of July, driven by an impressive 83% load factor in Copa Airlines. So, we continue to see strong demand for our services. With that, I will pass the call to Victor, who will discuss our financial performance for the quarter and our guidance for full year '06.

Thank you Pedro, and again thank you all for joining us today. First, let me begin by joining Pedro one more time in congratulating all the men and women of Copa for another outstanding quarter.

As Pedro mentioned, Copa Holdings reported a second quarter net profit of $22.9m, reflecting a year over year increase in net profit of 51% and diluted earnings per share of $0.53, well above conservative estimates of $0.44 per share.

During the second quarter Copa Holdings saw a significant increase in consolidate revenues as operating revenues reached $191.5m, reflecting a quarterly year over year increase of 39%, or $54m. Of this increase approximately $38m was due to growth in the Copa Airlines segment, while the remainder relates mostly to AeroRepublica's passenger traffic growth and, to a lesser, extent the full quarter effect of its consolidation into Copa Holdings. And the acquisition of AeroRepublica took place on April 22, 2005.

Unit revenues of RASM for Copa Holdings remained strong at $0.117 for a quarterly year over year increase of 8.1%. Contributing to higher RASM was a 9% increase in yield to $0.158, and 0.5 point increase in load factor was 69.7%. On a quarter over quarter basis RASM decreased approximately 1%, as a result of a 7.1% decrease in RASM at AeroRepublica. However, this was partly offset by 0.4% increase in RASM at Copa Airlines as a result of a 2.3% quarter over quarter yield increase.

Consolidated passenger revenues for the second quarter, which accounted for 94% of total operating revenues, reached just under $180m for a quarterly year over year increase of 42%, or approximately $53m. Of this increase $60m related to AeroRepublica, about $38m related to Copa Airlines operations, which for the second quarter saw a year over year capacity increase of 18.6%, a year over year load factor of 5.9 points to 76%, and a year over year increase in yield of 6%, to $0.154.

Looking at our costs, consolidated operating costs for the quarter increased 39% year over year, or $46m, of which $21m relates primarily to AeroRepublica's increased capacity and higher jet fuel prices, along with AeroRepublica's full quarter consolidation effect. While the remaining $24m relates, for the most part, to Copa Airlines segment increased capacity and higher jet fuel prices.

With respect to unit costs, consolidated cash and we [set] that for a quarterly year over year increase of 8%. This increase was a result of higher jet fuel prices, [jet fuel] CASM remained steady on a quarterly year over year basis at $0.0647. While reflecting a slight increase compared to Q1 '06, which came in at $0.0640

Now comparing Copa Holdings main operating costs versus the second quarter of '05, fuel expense increased 65% year over year, or $21m, mostly as a result of increase in fuel prices, higher fuel consumption as a result of increased capacity, and the full quarter effect of consolidating AeroRepublica. The all in average price of jet fuel per gallon for the quarter increased 28%, from $1.76 in Q2 '05 to $2.25 in Q2 '06.

Salaries and benefits increased 49% year over year, or $4.8m, mainly as a result of an overall increase in operating headcounts due to increased capacity.

Passenger servicing increased 24% year over year at $2.8m, as a result of an increasing capacity as well as traffic and the full quarter effect of consolidating AeroRepublica.

Commissions increased 29% year over year at $3m. For the most part, we saw the higher passenger revenue, a higher average commission rate at AeroRepublica, and the full quarter effect of the consolidation of AeroRepublica's commission expenses.

Maintenance, materials and repairs increased 63% year over year or $4.7m, mostly as a result of AeroRepublica's major overhaul completed in the second quarter of '06.

With respect to aircraft rentals, we saw an increase of 23% year over year of $1.7m, most of which related to additional leased aircraft at AeroRepublica. Landing fees and other rentals increased 47% year over year, or $1.8m, mainly due to Copa Airlines increased operations.

The remaining operating expenses increased 22% year over year, or $6m, as a result of a 22%, or $1.7m, increase in reservation and fuel expense, mainly as a result of incremental passengers related to the Copa Airlines segment, a 29% or $1.7m increase in flight [inaudible], mainly as a result of an increase of Copa Airlines operations and increase air to ground communication rates, and a 25% or $2.1m increase in other expenses.

Second quarter consolidate earnings before interest, taxes, depreciation amortization and aircraft rent, EBITDAR, increased 28% year over year to $46,1m. While the EBITDAR margins decreased 2.2 points year over year to 24%. However, [the] Copa Airlines segment EBITDAR margins increased 2.4 points year over year reaching 31.8%.

With respect to operating earnings, second quarter operating earnings increased 40% year over year to $28.5m, while operating margins increased 41% year over year to 14.9%, with the Copa Airlines segment showing a healthy 4.6 points increase in operating margins, from 17% in Q2 '05, to 21.6% in Q2 '06.

Turning now to our balance sheet, Copa Holdings entered the quarter with approximately $156m in cash, cash equivalents, short-term and long-term investments, and approximately $35m in committed lines of credit. We made [up] $7.3m of restricted cash at the end of the quarter. Copa Holdings liquidity achieved $183m, or approximately 25% of last 12 months operating revenues, a very strongly liquidity position for the Company.

Property, plant and equipment increased approximately $99m during the quarter to $744m, mostly as a result of the acquisition of two Embraer 190s and one Boeing 737-700.

[Debt and] capitalized leases at the end of '06 totaled $774m, of which bad debt totaled $539m, and of which approximately two-thirds is U.S. acting bank guaranteed debt. Of the total Copa Holdings bad debt outstanding as of June 30, approximately 57% has been fixed at an average rate of 4.57%.

In summary, we had a very strong second quarter, both financially speaking as well as operationally. And we continue to be well positioned for another year of strong results. Looking forward and based on the strength of our first half we’re revising upward our full year consolidated guidance to reflect a full year RASM in the range of $0.118 up from $0.114. A slight increase in ex-fuel CASM was $0.6.4 to $0.65, an increase in operating margins to a range between 16 and 17.5%, up from 15.5% to 17%. Our capacity guidance remains unchanged at approximately 7b ASMS for full year '06. And our guidance for average load factor also remains the same at around approximately 71%.

With that I will hand over to Pedro for closing remarks.

Thank you Victor. As we have seen, Copa Holdings had a great second quarter, despite many challenges. Special thanks to our [whole] team on a job well done, who continue to perform, and are the main driver of these excellent results.

To our shareholders, thank you for your continued support. Rest assured that Copa Holdings management and its employees are committed to delivering world-class results, as you have seen today. Now, we will open up the call for questions.

Thank you. [OPERATOR INSTRUCTIONS]. And we will take our first question from William Greene of Morgan Stanley. Please go ahead.

Yes, good morning. I'm wondering if you can talk a little bit about the pricing power that you're seeing. The results would suggest that you're not seeing any demand elasticity as you raise prices for fuel. But do you agree with that? Or are there some markets that are performing better than others?

Is that a correct statement, Bill good morning. We've seen strong demand for our services. As you know, our services and our clientele is mostly business orientated. And the economies are growing in Panama and in the region. So, we've seen a -- we've kept our pricing power and haven't seen a lot of elasticity. Do you want to add anything Victor?

Yes, Bill, just add to that if we look at -- at the end of the day the passenger cares about the bottom line price they pay. But if we look at specifically at the fuel surcharges that were implemented this last year, in the first half of this year we've generated over $24m in fuel surcharges, and that compares to $8m in the first half of'05. So, that would seem to indicate that the pricing power remains, and the load cycles have not been effected by the pricing move that we made, and the fuel surcharges that we have implemented. As a matter of factor, the load cycles are pretty unexpected.

Okay. And then for AeroRepublica, do think this quarter's results are the low point for the net earnings? Or is there more change to come that will cause the earnings to be this weak going forward?

Well, we believe it is a low point for a number of reasons. It's the lowest quarter of the year, for one. Also, we're implementing a number of initiatives, some of which I already mentioned, that will strengthen the load factor, will strengthen the result. Plus, towards the end of the year they will start getting the Embraer 190s, which are going to right size capacity for them. So, we expect a much better second half.

Okay and then just one quick question on hedging, Pedro could you just go over it? I didn't catch it if you said it earlier?

We did not mention hedging on this --

No, no. Yes, I was talking about the fuel surcharges?

Well, with respect to hedging, we've been in the past couple of months increasing our hedge positions going forward. We've taken into account Copa Airlines segment volume for the third quarter and fourth quarter we have approximately 25 to 26% of our volume hedged at prices ranging from $2.11 to $2.21 a gallon and that's not [simply] for jet fuel.

And then we also have already some positions for ’07. For the first quarter and second quarter we have roughly 15% of our volume hedged. And we even have some for third quarter approaching 10% for third quarter. So, we’re moving in more aggressively to achieve our higher position with respect to hedging.

And the 2007 hedges are at lower prices than 2006?

No, they are at higher prices. They’re ranging from $2.28 to $2.30 range.

Okay, thanks for your help.

We’ll take our next questions from Ray Neidl, Calyon Securities. Please go ahead.

Good morning.

Good morning, Ray.

Good morning, Ray.

Tax rates going forward looked a little low in the quarter. I was just wondering if you could give us guidance about your tax rates going forwards and what’s your overall estimate for the average price of fuel going forward?

Sure. With respect to tax rates, the reason it looks low is because of the AeroRepublica result in the second quarter. Going forward the effective rate for the year for 2006 we’re looking at is somewhere in the range of 9 to 10%, which is somewhat lower than the 11% we were looking at earlier in the year. And again that’s a function of Q2 AeroRepublica performance.

With respect to -- what’s the other question, Ray?

The other one was just, what’s your estimate the average price of fuel will be for --

Yes, okay. The average price of fuel that we’re looking at for the second half of the year, we’re looking at something in the range of $75 a barrel and assuming a [crack] in the range of $15 or so.

Okay, great. And my second question is -- very general question -- now that Continental has sold most of their equity stake in your airline, will there be any change in relationship at all? Or is that just cosmetic the relationship as it was before?

Well, it’s not cosmetic from the standpoint that it meant some interesting money for them. But in terms of the relationship it is. It won’t change anything. As a matter of fact, the relationship is as strong as ever. We keep on actively looking for ways to strengthen the opportunities we have to enhance revenues or customer service. And that’s beside the fact that the agreements were extended for ten years back in December.

But agreements are one thing to me it’s even more important the way we work together. And we’re working together as well as ever. So, we see no changes from them selling down to 10%.

Great. Congratulations, good quarter.

Thanks, Ray.

Thank you, Ray.

We’ll take our next question from Michael Littenberg, Merrill Lynch. Please go ahead.

Good morning, gentlemen, this is Lily on behalf of Mike.

Hi, Lily.

Hello, Lily.

Hello. My questions are mainly regarding AeroRepublica.

And the first question is regarding the news that you announced yesterday, that you [will be] another, two other available Embraer 190 aircraft. Are you -- the two aircraft are completely incremental in the sense that you are not sending the [inaudible] down the MD-80 aircraft faster? That is the two aircraft are going to add to the fleet and it’s not going [as fast] as for the MD-80 aircraft.

We have not -- in terms of the ’07 delivery and the two additional leases that we announced yesterday, we have not finalized the network studies. So, we’re not sure those are going to be replacement or growth. There is a good possibility that they may end up being replacement. But, as mentioned, we’ve contracted an outside consultant. And now we’re doing the scheduling and the plans for both this year and next year. So, after that study is completed we’ll have a better idea of how their capacity is going to look. But, again, there is a good chance that those aircraft could be replacements.

I see. My second question is regards to a lot of the initiatives that is ongoing over at AeroRepublica. Pedro and Victor, maybe I am mistaken, but I know the original idea is to transfer a lot of Copa’s know-how over to AeroRepublica. But I also notice that there’s quite a -- you guys are -- seem to be using a lot of outside consultants as well.

Were these outside consultants that [inaudible], basically [inaudible] like it was -- that’s how you had [transitioned] the transition? Do you think it’s helped by outside consultant? Or are these more additional projects that you felt that would be better to be outsourced, if you would, just to [inaudible] on the [very] [procedure of both].

Well, a little bit of both. In terms of the -- it’s actually two outside consultants we brought in. One is to design the future image. That we were always going to do that way, since we’re not experts in airline image and in planning for it. So, we had some ideas. We had to validate them. So that’s basically what we’ve done. It’s not a huge work. They’ve just done some market studies and they’ve validated some of the ideas we had and come up with a new image for AeroRepublica. We will be announcing that in the next month or so. So, that was always planned for.

Right.

What maybe was not planned for was the network study. And that’s the result of the low load factors the first half of the year. And we’re experts to a point but we’re not 100% experts in the Colombian market, for example. The outside consultant had better tools. We had our own ideas, but felt that it would be positive to have someone from the outside come and do their own study and compare it to ours. So, that’s what we’ve done.

However the work that Time [inaudible] is putting in, the know-how that’s changed that’s going on is the same as previously planned. It’s quite extensive and it’s going to yield good results for AeroRepublica.

Right, would this outside consultant add significantly to the cost of the transition? Or is it not something that we need to worry about?

No, not at all. Both have costs that won’t even show up in decimals.

All right.

We’re talking about the two together, less than $100,000 value. We’re not talking big money here.

Perfect, thank you very much.

We’ll take our next question from Steve Trent, Citigroup. Please go ahead.

Yes, good morning, gentlemen.

Hi Stephen, good morning.

Hello, just one question with respect to your strategy of ticket sales via the Internet. You mentioned AeroRepublica are having 36.5% level of ticket sales through your site. I was wondering given Copa main lines higher business travel, what general strategy with direct ticket sales through Copa’s main line site for is Panama-based traffic.

Okay, Steven, the number was the e-ticket, electronic ticket, it’s not so via the Internet. It is 36% or so number. You saw the Internet sales are still tiny, very little.

Forgive me, okay. And just one other question with respect to AeroRepublica, it seems as well that in the quarter itself that you did some heavy maintenance. And I was wondering to what degree that contributed to the quarter’s loss.

Sure, to a great degree. If you look at the prior quarter the event that it had -- maintenance events featured in that. And in overall [inaudible] many, we are talking about both an increase in the number of events and also an increase in the tracked [current events].

Going forward if we look at the third quarter and fourth quarter, we don’t expect that impact to be as large. But having said that, when you have a fleet of MD-80s and DC9s when fleet checks, you will find maintenance that will have to be done. And as the fleet ages it will be more expensive maintenance. And that’s the reason we’re bringing the Embraer 190. So, [we free those] MD-80s and have lower maintenance costs.

It looks like on the fleet side alone there is still pretty enormous upside in your Colombia business.

We think so, yes.

Terrific. Thanks very much, guys.

Thank you.

We’ll take our next question from Jim Parker, Raymond James. Please go ahead.

Good morning, gentlemen, I have [Buck Horne] here with me who may a question in a minute. I want to ask about AeroRepublica. What are the trip costs for the 190 versus trip costs for the MD-80? And just pick a particular market or stage [line].

Yes. Generally speaking, when you look at our cost per block hour basis, you’re looking at $4,000 per block hour for the MD-80 versus $3,500 for the 190 included -- including ownership costs. And that’s where we see the benefit of having the Embraer 190 replace the MD-80. So you’re not just looking at more -- just the right type aircraft for the market that we’re serving. But it’s more efficient aircraft on cost per block hour basis.

So Victor, if you just take current revenue that you’re getting from MD-80 and apply against those lower trip costs are you in the black?

We would be in the black. Generally speaking, if you look at an MD-80 being replaced by Embraer 190, the bottom line impact without giving benefit to the product, or increased sales, as a result of having a better product. Just mathematically speaking for aircraft we’re better off $100,000 per month per aircraft.

$100,000 per month per aircraft?

Yes.

Okay, thanks a lot.

[OPERATOR INSTRUCTIONS]. And we’ll take our next question from Rodrigo Goes, UBS. Please go ahead.

Hello guys, great quarter, just a couple of questions from me. The first one on yields you’ve been able to keep your yields at really Brazilian levels here. What do you expect yields will -- how do you expect yields trend through the remainder of this year as you introduce new routes, and next year as well? On a year over year basis have you guys -- do you guys have estimates you could share with us?

We expect yields to remain healthy but steady. We’ve seen a great gain in yields since 2005, both as a result of higher fares in [inaudible] market, but also the result of higher fuel surcharges that we implemented. But we don’t expect that increase that you’ve seen from ’05 to ’06 to continue indefinitely. So, we think we’ve reached a point where we’ll be in [inaudible] yields.

So, you were talking about flattish yields on a year over year basis through the remainder of this year?

In that range that will be our outlook.

Okay. And next year, what’s the -- is it more of the same, or what do you expect?

We expect yields in 2007 to be similar to the yield that we’re seeing in 2006. And in the next quarter -- in the next earnings call, the next quarter, will be providing a preliminary guidance for 2007.

And obviously what happens to fuel will have an impact. And that’s hard to predict right now.

Absolutely.

Okay. With the shift in [gears] to Colombia, do you guys have an estimate or a guess as to how much that particular market will grow for, let’s say, 12 months in terms of RPKs?

In terms of revenue passenger miles?

Right.

In terms of traffic, the overall domestic market in terms of traffic has been growing at a little over 3% so far this year. International traffic has been growing more rapidly.

We don’t expect major improvements in the domestic market. It may grow a little bit faster, but it won’t be a major change. So we’re right sizing our fleet and we’re sure that’s going to have an impact. But just in general the strength of the product and some of the other initiatives we’re taking should yield better results.

[Of course, at] AeroRepublica we’ll do more flying into our Panama hub, such as the recent startup flights from Bogota to Panama, so that will also contribute.

What’s preventing a higher rate of growth in Colombia? The [inaudible] over there is certainly doing a lot better now than it was a year ago. And Brazil where [inaudible] really hasn’t grown all that much, passenger traffic as well is at much higher levels. I’m just curious to understand why coming from a somewhat modest base, passenger traffic hasn’t picked up more in the [investor] market in Colombia.

I think you’d have to get to a point where we’ll speed up and grow even more. But one of the things that has happened in the recent past with [question to rebate] it has more safety in the roads and the streets, so there’s more people driving than before. So, that has had an impact in slowing down the growth. There’s still growth there, but it has had some sort of an impact. And in general, there’s more people flying internationally, so eventually that’s going to have an impact inside Colombia.

That’s interesting, okay, thanks a lot.

And we’ll take our next question from Buck Horne, Raymond James. Please go ahead.

Hello guys, just following on from Jim’s question. Can you quantify, maybe it’s a little too early, but the rebranding costs that you guys are planning on for AeroRepublica, how much are we talking about to remarket that airline? And how will that be spread out?

We’re don’t have a number to share right now, although we obviously have some figures. But what I can tell you is that we scaled back our original plans, or our original thinking, on how we were going to do this rebranding. And we’re not going to come out with a big bang, spending all the millions in the world to do this. And the reason -- again, I cannot tell you exactly what we’re going to do has to do with the new image. The new image will not require as much effort as what we thought we needed before. So, the costs are going to be very manageable and are obviously in our projections for the rest of the year.

And one additional one. What -- you’ve done the -- or you’re working on the study for the capacity in the market. What’s [exactly] prevented you from maybe being a little bit more aggressive in terms of holding down the capacity with the current MD-80 fleet down there?

It’s difficult to cut capacity and be successful. It’s not an -- it’s easier said than done. As you know, a lot of the costs are fixed in this business. And you may lose your revenues and retain your costs and that’s even worse than the alternative.

So, we’re being careful in not making any major mistakes. We have a [leased] commitment we have to comply with and we have a growing competitor also. So, that’s why we’ve hired outside consultants and we feel we’re going to make some adjustments. But in a very small way, we will retain as much of our current revenues as possible and reduce our costs by an even higher percentage. So we’ve taken our time. I agree. But it’s -- sometimes that’s better than just shooting from the hip.

Thanks.

[OPERATOR INSTRUCTIONS]. We’ll pause for just a moment to give everyone another opportunity to signal. And at this time we have no further questions. I would like to turn the conference back over to senior management for any additional or closing remarks.

Well, thank you everyone for joining us. It was nice to hear of you again. We look forward to having you back for our third quarter earnings call. So, have a great day and you know where to reach us. Thank you very much.

And that does conclude today’s presentation. We thank you for your participation and you may disconnect at this time.