Copa Holdings SA (CPA) 2008 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Copa Holdings second quarter 2008 earnings call. During the presentation, all participants will be in 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 on August 14, 2008.

And now I'd like to turn the conference over to Mr. Joe Putaturo, Director of Investor Relations. Sir, please go ahead.

Thank you very much, Operator, and welcome, everyone, to our second quarter earnings call. Joining us today are Pedro Heilbron, CEO of Copa Holdings and Victor Vial, Chief Financial Officer.

First, we will open up the call with an overview of the second quarter highlights, followed by Victor, who will discuss our financial results. Immediately after, we will open up the call for questions from analysts. We kindly request if you could limit yourself to one question with a brief follow-up so we can accommodate most questions.

In today's call we'll discuss non-GAAP financial measures. A reconciliation of non-GAAP to GAAP financial measures can be found in our second quarter earnings release, which has been posted on the Company's website, Copaair.com. 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 and results.

These forward-looking statements involve risk and uncertainties that could cause actual results to differ materially, and are based on assumptions that are subject to change. Many of these risks and uncertainties are discussed in our annual report filed with the SEC.

Now I'd like to turn the call over to our CEO, Pedro Heilbron.

Thank you, Joe. Good morning, and thank you for participating in our second quarter earnings call. First of all, I would like to thank and congratulate all of our coworkers for delivering another very solid quarter. We continue to deliver industry-leading results, thanks to their efforts and commitment.

As you know, these are difficult times for our industry. Fortunately, all the initiatives our team has made in the past, and their continued focus on the future, are paying off now. Our results would most likely be very different today if we did not have one of the youngest and most efficient fleets in the Americas.

If we had not set in place through our conservation and other technological initiatives, such as the early adoption of blended wing lift in our Boeing and Embraer fleets, and pioneering the implementation of RNAV in our region. If we had not invested in our pilot training center, which has allowed us to recruit and develop pilots locally.

If we had not developed the most convenient network for intra-Latin American travel, or if our coworkers were not continually looking for cost efficiencies without sacrificing our award-winning customer experience.

These are only a few of the initiatives that, despite today's difficult environment for the industry, allow our Company to consistently deliver industry-leading financial and operational results.

With this said I am pleased to highlight that for the second quarter, Copa Holdings recorded net income of $30.4m or diluted earnings per share of $0.70, despite a 56% year-over-year increase in fuel prices.

This came as a result of exceptional revenue growth, which increased nearly 27% above second quarter '07 on 11% capacity growth, with Copa Airlines capacity growing 17% year-over-year. And we ended the quarter with a very healthy balance sheet and liquidity position.

On the operational front, Copa Airlines once again delivered leading on-time performance and completion indicators, with on-time performance coming in at 89%, and flight completion factor at 99.7%.

During the second quarter, Copa Airlines took delivery of three aircraft, two Embraer 190's in April and May, and a Boeing 737-800 In June. Copa Airlines currently has a fleet of 40 aircraft, with an average age of four years. And Copa Holdings' consolidated fleet, including Aero Republica is currently composed of 52 aircraft.

In May, Aero Republica added new direct daily service to Caracas, Venezuela from the Colombian cities of Bogota and Medellin. These two new routes to Caracas represent another step forward in Aero Republica's plan to increase its participation in Colombia's international market, and its continued effort to provide more and better options for our passengers.

On June 30, Copa Airlines announced new service from Panama and connecting cities to Belo Horizonte, Brazil, beginning later this month. Also, a few days ago, we announced service to three additional destinations, Valencia in Venezuela, Santa Cruz, Bolivia and the Island of Aruba.

With these destinations, by the end of the year Copa Airlines will provide service to 45 destinations in 24 countries in the Americas. By far the most extensive and complete network for intra-Latin America travel, continuing to make our Hub of the Americas the most attractive and convenient connecting point within our region.

More recently, and as part of our future growth plan, in July, Copa Airlines announced an order for two Boeing 737-800 aircraft to be delivered in 2010 and 2011. We now have a total of 13 firm and 15 options in place for Boeing and Embraer aircraft.

Also in July, Copa Airlines received its new Embraer 190 flight simulator, becoming the first Latin American airlines to have both Embraer 190 and Boeing 737 flight simulators. This valuable training device will now enable us to provide training to our Embraer crews locally, saving time and money.

Now, looking at the current business environment, I am pleased to say that economies in the region continue to grow, and we expect strong demand for the remainder of the year. Latest growth forecast for Latin America calls for GDP growth of between 4% to 5% with Panama and Colombia expected to grow at 8% and 6%, respectively.

This healthy economic backdrop has led to increasing load factors with Copa Airlines, which represents the bulk of our capacity, coming in with a load factor of 78% during what traditionally is our low-season quarter.

Looking ahead at the third quarter, we continue to see healthy traffic numbers. In fact, on Monday we released our July traffic figures where Copa Holdings load factor increased almost 1 percentage point, to 81% with our core business, Copa Airlines, coming in close to 85% on a 15% capacity growth.

This strong underlying demand is facilitating revenue management initiatives and setting the stage for good top-line performance in the third quarter, which will help lessen the impact of incremental costs related to extraordinary run-up in fuel during the quarter.

We are extremely pleased about the demand environment and the performance of the Company. Keep in mind that Copa Airlines' network has increased from 30 to 41 destinations in the past two years and has stimulated significant capacity growth, while still delivering industry-leading margins, as well as stellar operational performance.

In addition, we maintained a very solid balance sheet with ample liquidity and adequate leverage. So although the industry, as a whole, is facing a difficult situation, we are well positioned to weather this storm and come out ahead.

We remain, now more than ever, focused on the long-term growth and profitability of the Company. Our strong financial and competitive position affords us the flexibility, as in the past, to gain distance from our competitors and strengthen even more our position.

In fact, our previous operational plan did not contemplate the opening of Aruba, Valencia and Santa Cruz during the second half of this year. The anticipated launch of these new destinations, are a concerted effort to seize the opportunity to further consolidate our network and hub.

Copa will now be serving five new destinations this year first, Port of Spain, which we began in March. So far, load factors have exceeded our initial expectations, and we are already planning to increase frequencies from four weekly to daily, later this year.

Our second destination, Belo Horizonte, Brazil, which we will begin service to this month, will be our fourth Brazilian destination. Even though it is the third-largest city in Brazil, with a metropolitan area population in excess of 5m, it is not well-connected to the region, especially to Central America and the Caribbean.

Aruba complements our network nicely, especially in South America, where it's a very popular destination. Our fourth destination plan for this year is Valencia, Venezuela. Valencia, with a population of 1.5m is our third Venezuelan city after Caracas and Maracaibo, and one of the country's main economic centers, containing some of its top industries and manufacturing companies.

And finally, Santa Cruz, Bolivia, will represent Copa's 20th South American destination. Santa Cruz is another important city which is also not well-connected with our region. It is the most popular city in Bolivia, as well as the capital of one of its most productive departments.

Our current operational plan for Copa Airlines calls for capacity growth of 17%, compared to our previous growth forecast of 19%. This slight reduction comes partly as a result of optimizing capacity in multiple-frequency destinations during our low-season months, as well as some delays in obtaining all the necessary authorization and ramping up service for flights we are planning to start -- we were planning to start earlier in the year.

With regard to Aero Republica, we expect a capacity reduction of approximately 9%, compared to 2007 mainly as a result of changes in the operational plan, driven by a reduction in frequencies and some marginal domestic routes, given these unprecedented fuel prices, plus a down-gauge to Embraer 190s.

In terms of financial results, for the second quarter, Aero Republica reported a $2.8m operating loss in what is seasonally its weakest quarter. Although top-line growth was healthy, the airline's operating results were affected by increased fuel costs and the timing of major overhauls that related to the MD-80 fleet.

However, given the dynamics and seasonality of the Colombian market, we still expect Aero Republica to come in with an operating profit for the year, despite record high fuel prices, and still flying approximately half of their ASMs and less-efficient MD-80s which, as we have mentioned, are due to exit entirely before the end of next year.

So to recap, Copa Holdings second quarter was marked by healthy demand and capacity growth. Strong yields for both Copa and Aero Republica. A challenging fuel cost environment. And continued execution and strengthening of our business model.

Looking ahead, although we expect margins to be affected as a result of continued record high fuel prices, we believe the outlook for the year is still very positive on a standalone, and even more, on a relative basis.

As I mentioned before, we remain confident on our ability to continue driving unit revenues higher to mitigate this adverse fuel cost environment. This will be driven, to a large extent, by the continued preference of our network for intra-Latin America travel.

So thank you. Now I will turn it over to Victor, who will go over our second quarter financial result.

Thank you, Pedro, and good morning, everyone, thanks again for joining us. Let me start again by joining Pedro in thanking all the men and women in our team for their efforts, especially for their unwavering commitment to running a world class airline.

I am pleased to report that despite record high fuel prices, our team delivered another quarter of solid results, with Copa Holdings net earnings for the second quarter reaching approximately $30.4m, which translates to diluted earnings per share of $0.70.

Second quarter results were achieved in spite of 56% year-over-year increase in the price of jet fuel, which now [hedges] -- average $3.47 per gallon in Q2 '08, compared to $2.22 in Q2 '07, resulting in $37m of additional fuel expense.

We continued expanding capacity during the quarter with Copa Airlines, which accounted for 83% of Copa Holdings total available seat miles, delivering another quarter of strong growth with a 17% year-over-year increase in ASMs.

Generally, we continued to see strong demand for air travel in the markets we serve, as economic growth in Panama, as well as the rest of the region, remains very strong. This allowed for another quarter increased unit revenues at Copa Airlines, where revenue per available seat mile, RASM, climbed nearly 12% year-over-year, driven by higher load factors, which reached 78.3% for the quarter, together with an outstanding 9.4% increase in yields.

Aero Republica, which accounted for the other 17% of Copa Holdings total ASMs, decreased available seat miles 10% compared to the second quarter of '07, while revenue passenger miles decreased 4.3%. Consequently Aero Republica's load factor in Q2 '08, its low season quarter, increased 3.4 percentage points, to 56%.

Unit revenues at Aero Republica increased nearly 30%, mainly due to stronger yields, which showed an 18% increase compared to Q2 '07. Most of these yield gains were the result of the strengthening of the Colombian currency against the US dollar on a year-over-year basis.

Yield and load factor gains led to higher operating revenues for Copa Holdings, which for the quarter generated $298m of operating revenues, for a 27% increase over Q2 '07. Both segments showed strong revenue growth, with Copa Airlines operating revenues increasing 31%, while Aero Republic delivered a 16% increase. Passenger revenue for Copa Holdings, which accounted for 94% of total operating revenues, saw an increase of 27%, from $221m in Q2 '07 to $281m in Q2 '08.

On the expense side, operating expenses increased 36% year-over-year, or approximately $70m, while unit cost, or cost per available seat mile, CASM, increased 22% year-over-year to $0.127. However, as unit -- fuel unit costs increased 6.9% year-over-year to $0.078, mostly as a result of additional MD-80 maintenance events, a stronger Colombian currency and the effect of down-gauging to an Embraer 190 fleet at Aero Republica.

Now turning to Copa Holdings main operating expenses compared to the second quarter of 2007, fuel expense increased 75%, driven by an 11.7% increase in gallons consumed, due to increased capacity and a 56% increase in the average cost of fuel, net of realized hedge gains.

Salaries and benefits increased 13%, mainly as a result of an overall increase in operating headcount to support increased capacity, and the effect of the Colombian currency appreciation.

Passenger servicing increased 23%, driven by an increase in passengers carried by Copa Airlines, more international service offered by Aero Republica and the effect of the Colombian currency appreciation.

Commissions increased 6%, for the most part as a result of a 27% increase in passenger revenue, mostly offset by lower average commission rates in both Copa Airlines and Aero Republica.

Reservations and sales increased 19%, mainly due to more passengers carried by Copa Airlines. Maintenance, materials and repairs increased 21%, mainly due to more scheduled major maintenance events at Aero Republica, related to their MD-80 fleet.

Depreciation increased 23%, due to additional aircraft and spares. Aircraft rentals increased 29%, primarily related to leased aircraft supplemental rent and additional leased Embraer 190s at Aero Republica. And flight operations, landing fees and other rentals combined, increased 33%, mainly as a result of increased capacity and higher crew-related expenses.

Other operating expenses increased $1.6m or 12.5% year-over-year. And other non-operating income and expense totaled a net non-operating income of $2.7m. The main components of which are a net interest expense of $6.7m and a $5.7m gain related to the mark-to-market of fuel hedge contracts.

In terms of operating earnings, the Company produced $31.2m of operating profit, a $7.8m decrease compared to Q2 '07, while operating margin came in at 10.5%. Though this represents a slight drop compared to Q2 '07, we are extremely pleased with the capacity of our business model to continue delivering margins that are not only industry-leading today, but would be considered outstanding even before fuel prices became a major concern for the industry.

With respect to fuel hedges, Copa Holdings had 18% of its second quarter volume hedged through jet fuel swaps and crude oil [collars], and 25% for the second half of the year, using the same instruments. We have also hedged a portion of our '09 volume, having hedged 25%, 19% and 10%, respectively, for the first three quarters of next year.

Now moving on to the balance sheet, assets and owners' equity at the end of the quarter reached $1.9b and $592m, respectively, while debt and capitalized leases totaled $1.2b.

Bank debt at the end of the quarter totaled $896m, 45% of which is US acting bank guaranteed debt. 41% of our total debt balance has been fixed for up to 12 years, and the average blended rate, including fixed and variable rate debt for the second quarter, came in at a very competitive 4.3%.

In terms of liquidity, the Company maintains a strong position, with $347m in cash and cash equivalents at the end of the second quarter, which translates to approximately 30% of last 12 months' revenue.

So in summary, demand for air travel continues strong. Our model continues to deliver healthy margins, despite record high fuel prices. We are very pleased with our ability to continue growing our top line, through both yield and load factor gains. Our liquidity position and balance sheet are very solid. And we maintain our focus, as always, on expanding our network profitably.

Looking forward to the rest of 2008 and based on our revised outlook for jet fuel prices, we are updating our 2008 guidance as follows. We are revising our full year capacity guidance from 9.1b ASMs to plus or minus 8.8b, which compares to 7.9b ASMs in '07 for an 11% year-over-year consolidated growth.

On a segment basis, Copa Airlines will be growing at 17% year-over-year, while Aero Republica will decrease 9% as a result of rationalizing domestic capacity and down-gauging to an Embraer 190 fleet.

We are increasing our load factor guidance from 75% to 76%, up from approximately 74% in '07, as we expect demand for air travel to continue strong for the remainder of the year.

We anticipate a healthy fare environment. As such, our RASM guidance has been revised from $0.142 to plus or minus $0.146, compared to $0.13 in '07 for a 12% year-over-year increase.

In terms of unit cost, we're maintaining our CASM ex-fuel guidance at $0.075, compared to $0.071 in '07, in spite of a slight capacity reduction in our current guidance.

And lastly, we are maintaining our operating margin guidance in the range of 15% to 17%, compared to 19.2% last year, though we now expect to come in at the lower end of this range, as we are now assuming an average price of jet fuel for the year of $3.17 US Gulf Coast, compared to $2.98 in our previous guidance.

With that, I'll turn it over to Pedro for closing remarks.

Thank you, Victor. And again, thank you all for joining us today. At this time, we will be happy to open up the call for questions.

Thank you, sir. (OPERATOR INSTRUCTIONS) We'll take our first question today from Jim Parker with Raymond James.

Good morning, gentlemen. Just a quick question, Victor, it appears that you all have a bit more pricing power than most airlines, and that you have been able to raise fares sufficient to offset much of the increase in fuel prices. And I think in January at your Investor Day, you indicated that perhaps 94% of the fuel price had been offset. Where are we with fuel at $115? Have your fares been risen -- raised sufficient to offset the fuel at that level or how does it stand?

Somehow I knew you'd be the first one to ask that question, and that would be the first question you would ask. So right now we are standing at around 70% or so, when you take into account not only the fuel surcharges, but also fares, because we manage both.

And I think what's especially pleasing for us is that we've been able to do that and still we see very healthy load factors. So we haven't reached that point, that tipping point where you raise fares and you start seeing demand decrease.

So looking forward, and what's embedded in our guidance, is that we expect to be able to keep passing the additional cost of fuel to our passengers. And somewhere in the range of 70%, maybe a little bit higher than that to cover additional cost.

Okay. I think Duane has a question as well.

Yes, thanks. Just on the fuel hedge for the back half, I'm wondering what the specific percentages are for the third quarter and the fourth quarter, and what price you're hedged at? And the 317 for the year, does that include taxes and fees? Thanks.

Okay, yes. For the third quarter, we're hedged approximately 25% of our total volume, if you look at it from a Copa Holdings perspective. And for the fourth quarter as well, it's in that range, around 25%. We've been hedging using jet fuel swaps earlier on. And the contracts we have with jet fuel swaps have a range in the price of approximately 2.40 or so for both quarters, more or less. And jet fuel swaps represent around 13% for the third quarter and 9% for the fourth quarter, of the total volume that we have hedged fuel swaps.

Then recently, what we've been doing more of is hedging via crude oil collars, given how expensive it has gotten to hedge. And we have around 13% to 15% of our volume in Q3 and as well in Q4 hedged somewhere in the range of around $115 to $150. And that will be the band, with a floor of $115 and a ceiling of $150.

That's great, thanks. And then just on that 317, is that including the taxes and fees in your guidance?

No, that is US Gulf Coast.

Okay, thank you.

Yes.

And we'll take our next question from Nick Sebrell with Morgan Stanley.

Hi guys. First question has to do with the change in guidance. Is it right to say that it's really the softness in Colombia that you are basing the guidance change on? That we're probably seeing less ASM increase in Colombia than we are seeing -- than we expected previously?

And then if you could comment just a little bit on the Colombian market, in general. Is Aero Republica's performance reflective of what's going on in the market? Or is it doing better or worse than what's going on in the market, particularly the incumbent carrier there? I'm just curious to figure out whether what we're seeing in Colombia domestic market is a weak market or a market that's doing okay but maybe AR is experiencing some problems?

Thanks, Nick. This is Victor again. In terms of capacity guidance, basically it has to do more with the Copa side. And it's basically a function of two things. One is, as we mentioned in our first quarter earnings call, we're going to do as much as we need to do, optimization of capacity in the low-season months. And when fuel reaches $130, $140, we're going to be aggressively looking, especially at markets where you have multiple frequencies. And as you can see in our load factors, our load factors are very healthy. And we made some adjustments, and we expect to make some additional adjustments.

But also, besides optimizing capacity, we had later than expected launch dates for (inaudible), which some of them are starting now, which were supposed to have started before. And we are expecting some to start later in the fourth quarter. And the impact has been to bring down ASMs from 9.1b to 8.8b ASMs. So that's really what's behind it. It's more in the Copa side than the Aero Republica side.

Does that mean you're pushing off some capacity growth till next year? Is it more of a delay or is it a change?

No, it's a delay. And basically, what you'll see next year is the full year effect of what we are doing this year. So it will have an impact, but as a result of that.

And in terms of -- this is Pedro here. Nick, in terms of how AR is doing, the domestic market in Columbia has not growing -- has not been growing that fast, it's growing around 2.6% year-over-year in '08. And they did have a weak April. You saw that in the traffic release of April. Otherwise AR has been doing okay, after that and even before that. It just had a very, very weak April.

But we are pleased with their contribution to the Copa segment and to Copa Holdings. And as they are growing more internationally, which is what we've been doing lately, we expect that contribution to increase and we'll be even happier. So I think we're in the right track, although yes, they had a weak April and we could have seen stronger results overall in the second quarter.

And what's your outlook there, just generally speaking, in Colombia next year, conditions improving or the currency situation -- rather strong currency?

Well the currency situation is -- it's anybody's guess, but the economy is doing well. And the outlook for Colombia seems to be positive, if you ask us or anyone else. And we feel there are interesting opportunities for Aero Republica.

We are not growing capacity that much. Actually, we are reducing it, as Victor explained, mainly due to a down-gauge. And we are going to keep it, in the future, pretty stable. We don't expect big changes there. So I think that will give them a lot of room to improve on their results.

Also, on the operational side, they've been doing very well. And they are fast reaching our standards. So we are still very bullish with Aero Republica. And as mentioned before, their contribution to Copa Holdings is very valuable.

Excellent. Thank you.

And we'll take our next question from Daniela Bretthauer with Goldman Sachs.

Hi. Good morning. Just wanted to go back to the yield environment, so far, you've done a pretty good job increasing your yields on a sequential basis and both year-on-year. But how much your fares have gone up year-to-date, and how much is fuel surcharge mechanisms?

I would say, if you look at our second quarter PRASM, passenger revenue per ASM, and look at that increase, about half of that increase is a result of the fuel surcharge and the other half, roughly, is as a result of the -- of increased fares. Obviously that's an average and it will depend on different markets, but it's about half and half.

Okay. And how much more do you think your yields can increase from where they are, or where they ended in the first half?

Well that's embedded in our full year guidance for RASM. And we also gave you a load factor guidance. But directionally, what I can tell you is that in the remainder of the year, we expect yields to remain pretty steady.

But keep in mind, when you compare on a year-over-year basis, third quarter last year, you may recall, we had a revenue management issue. Obviously you'll see a big increase on a year-over-year basis for Q3. And then for Q4 you won't see that big gap. It will be more steady, but having increased -- showing the increase that we saw in Q1 and Q2 over Q4.

And your margins -- your operating margin guidance for full year, what sort of oil assumption are you factoring to get there, because you obviously -- it looks a bit challenging.

Right now we're assuming 317 US Gulf Coast. And it's based on the forward curve as it stands today. And we don't know how that's been moving in the past. And a few weeks ago, people -- everybody was talking about $180, $200 oil and now there are people talking about $80 oil. So we'll see.

So if it's at least that then you're comfortable with the 15% to 17%.

That's what we're basing our guidance on.

And when does Aero Republica, last question, when does Aero Republica actually [convey its] loss? But does it become profitable already in the third Q, based on what you're seeing so far in July and August?

Well their second half of the year is a lot stronger than the first half. So we always -- we have always seen and we expect an improvement during this third and fourth quarter. And I think we mentioned during the call that we're expecting them to have -- to come in with a positive operating profit for the year.

And also just to follow up, you had some maintenance expenses in the second quarter. How much of that would you say is, not non-recurring, but higher than expected? And where do you think your non-fuel CASK can stabilize?

Well Victor is trying to find -- see if we have any numbers with us, but a lot of this -- to see if we can give you that (multiple speakers).

There was an MD-80 and --

The MD-80 stock is non-recurring, to a point. It will be non-recurring once the MD-80s are gone. They'll be gone by the end of '09. And what happened this year, compared to last year was just a matter of timing. We've had a number of major airframe inspections and engine events that we did not have last year. And again, that's pure timing.

And as we exit that fleet, which will happen by the end of '09, we'll be with an all-new Embraer fleet where the maintenance intervals are going to be longer. So we expect that improvement there. I don't know if we have the breakdown, however.

Well generally speaking, what we can say is, in terms of the 190 economics, as we'll replace the MD-80s we expect the CASM obviously to be higher as a result of the 190 having less seats, so somewhere in the range of 11%, 12% higher CASM, versus the MD-80.

However, on a trip cost per block hour basis, it will be around 20%, 22%, 23% lower than the MD-80. So we do expect to see the benefit of a full Embraer 190 fleet, as we get rid of the last four MD-80s in the second half of next year.

Okay, great. Thanks.

And we'll take our next question from Keith Weissman with Calyon Securities.

All my questions have been answered. Thank you.

Thank you, sir.

That's good.

Thank you, Keith.

(OPERATOR INSTRUCTIONS). We'll go next to Steve Trent with Citigroup.

Good morning, gentlemen.

Hi Steve. How are you?

Hi. Good, thanks. I'm almost in the same boat as Keith Weissman, but not quite. Forgive me, I missed one piece of the call when you were talking about pilots, but just a quick question there. Looking at your plans going into these new routes over the second half of this year and into 2009, could you just provide an update on your situation in terms of pilot availability. And forgive me if I missed what you already said.

I actually did not mention that, so you didn't miss it. No, we're being very successful in hiring and training all the pilots we need. And the fact that we now have two simulators here in Panama, both the Embraer and the Boeing simulator gives us a lot of flexibility. So we are fine there. We've solved that issue and we are being very successful again in hiring and training all the pilots we need.

So I've heard from one or two of my industry contacts that some of your competitors, perhaps Grupo TACA, maybe one or two other guys, have cut back a little bit. Are you seeing, to some degree, some better availability as some of your competitors have maybe lightened their employee ranks a little bit?

Directly, we have never hired away from them. And in their -- some of those competitors are flying different fleets. I'm not sure we've been looking in the same places for pilots. But maybe it has to do with, overall, what's happening in our industry worldwide, and the fact that we are -- we have strong results and we run a very good airline and we are based in an attractive country. So maybe a combination of those factors makes it easier for us to find, train and retain the necessary pilots.

Okay, fair enough. Thanks gentlemen.

Thank you.

(OPERATOR INSTRUCTIONS). We'll go next to Michael Linenberg with Merrill Lynch.

Good morning all. Two questions and maybe you said this, I may have missed this. Victor, I know you had given hedge information for the second half of 2008 did you give a hedge position for '09? As I recall, you had a small position on it early '09. I just wanted to get an update on how things stood.

Yes, we do have some hedges already in 2009. For the first quarter we have 25% of our total volume hedged, second quarter 19% and for the third quarter 10%. And they're mostly crude oil collars, which is what we've been doing recently, given the price of hedges.

And what we're doing is we're going to continue. We're going to stick to our strategic hedge policy, which I think it's working quite well, especially in light of the fact that we can recover a significant portion of the additional cost via our top line.

How much, can you just give me a sense of the range of the collars, even just rough ranges?

Yes. It's in the range of 114, 115 on the floor, and 150 or so on the ceiling.

Okay. And then my second question. I noticed you took your RASM guidance up for the year, certainly a good thing. And you talked about yields being strong, Pedro, in some of the commentary.

I'm just wondering, as you develop the network and you add more connectivity, are you seeing any shifting in the mix between business or leisure? When you talk about the strong yields is it more of a function of some of the connecting markets, or is it just the local markets of Panama?

I'm trying to get a better sense of what's driving the stronger results, if it's more -- disproportionately one part of your system, whether it's business, leisure or connect versus local.

No, we've been raising everything across the board. And I don't think the emphasis has been one segment or the other, in that sense. And when you look at the new routes we are announcing for this year, even starting with the ones which started already, there are mainly business markets for us.

Some will have a leisure component, of course, so we're always looking for that mix. But they're mainly business destination. And even the leisure -- a leisure destination, such as Aruba, is kind of a high-yield, a high-level destination. So no, we are -- we have not seen significant changes in that mix you were mentioning.

Okay. Alright, very good, thank you.

And gentlemen, it appears we have no further questions. I'll turn the call back over to you for any additional or closing remarks.

Okay. No more, okay. Thanks again. Rest assured that our team remains focused on the opportunities and challenges ahead. And we look forward to having you back for our third quarter earnings call. Have a great day.

And that does conclude today's conference call. Thank you for your participation. You may disconnect at this time.