Copa Holdings SA (CPA) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Copa Holding First Quarter 2011 earnings 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 on May 5th, 2011. Now I will turn the conference call over to Joe Putaturo, Director of Investor Relations. Sir, you may begin.

Thank you very much, Operator, and welcome, everyone, to our first quarter earnings call. Joining us today are Pedro Heilbron, CEO of Copa Holdings and Victor Vial, our Chief Financial Officer. First, Pedro, will open up with an overview of our first quarter highlights, followed by Victor who will discuss our financial results. Immediately after we'll 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 all questions.

As announced last week, Copa Holdings First Quarter Financial Results have been prepared in accordance with international financial reporting standards. For comparative purposes, our first quarter 2010 financial results previously presented in accordance with US GAAP have been restated under IFRS.

In today's call, we'll discuss non-IFRS financial measures, the reconciliation of the non-IFRS to IFRS financial measures can be found in our first quarter earnings release, which has been posted on the Company's website. In addition, our discussion will contain forward-looking statements not limited to historical facts that reflect the Company's current beliefs, expectations, and our 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 our call over to our CEO, Pedro Heilbron.

Thank you, Joe. Good morning to all and thank you for participating in our first quarter earnings call. As always, my gratitude and recognition goes out to our coworkers for delivering another strong quarter, one which our operating revenues grew nearly 25% and in which we delivered an operating margin of almost 24%. Among the main highlights for the quarter, the (inaudible) trends continue to be very strong with passenger traffic increasing a very healthy 20% for the quarter. Our consolidated load factor came in at a very robust 77.3%, even more so when you take into account that year-over-year capacity grew 25%.

Strong overall demand also resulted in a healthy revenue environment as both yield and [revenue] were higher year-over-year. This made substantially increase in our [rate] average length overall. Our strong revenue performance, along with an important year-over-year reduction, in it's fuel (inaudible) led to an operating earnings of $101 million, which represented an operating margin of 23.9% for the quarter. Adjusted net income came in at $82 million, representing year-over-year earnings growth of more than 30%.

I'm also pleased to highlight that we ended the quarter with a very solid balance sheet and cash position. In fact, yesterday our board of directors approved a change in our dividend policy, which was previously up to 20% of annual net income to up to 30% of annual net income. At the same time, the Board declared the distribution of a dividend of 30% of our 2010 annual net income to be determined by our audited IFRS financial statement, which will be reported in our 20-F filing this month.

The dividend will be paid on June 15th, to all shareholders of record as of May 31st. The change in dividend policies brings forth to management and the Board's confidence in the Company's performance, cash position and continued financial strength. On the operational front, during the quarter we took the liberty of two Boeing 737-800s. As a result, our fleet at the end of the quarter stood at 66 -- 65 aircraft, 39 Boeing 737-NG and 26 Embraer 190's, with an average age of less than five years.

In March we announced new service to Brasilia, this fourth new destination we have announced for 2011. And for the quarter, Copa Holding reported on-time performance of 92.4% and a flight completion charter of 99.8%, which once again places us among the best in the industry, on top in Latin America.

In short, we had a great quarter financially and operationally and going forward we're very pleased with demands trend. Traffic trend continues to be broad-based and growing across all regions. We're also seeing positive trends in business travel, as corporate accounts increase their overall travel spending.

As a result, we're now projecting a significant improvement in unit revenues, which should help us mitigate the impact of higher fuel costs. The outlook for the region and for Panama in particular is very positive. As a whole, the region's GDP is expected to grow close to 5% in 2011, driven by strong domestic demand and a surge in commodity prices, among others. In addition, Panama is expected to have another year of outstanding economic growth forecasted to come in above 2010, 7%.

The [concrete] consolidating itself as one of the most important trade and business hubs in our region. Benefitting from a unique geographic position, which makes it the gate-point of the America, a healthy and diversified economy, a strong and thriving financial system and an overall business friendly environment. This is resulting in a heavy flow of private sector investment, including banking, ports, telecommunications, construction, transportation and tourism among others in addition, to an ambitious public sector infrastructure agenda, including the current and the next phase expansions of the Tocumen airport. So we feel the moment is right to step up our growth plan and as you know, that is what we have done.

In 2011, we will receive ten 737 800 aircraft, including five new leases we signed last year, to end the year with a consolidated fleet of 73 aircraft. We have already received three aircraft and the remaining seven will be introduced in the second half of the year. In terms of ASM, this should result in consolidated capacity growth of approximately 20%.

In June we will be transitioning from a four bank to a six bank cost structure, which involves adding an early morning bank and a mid-afternoon bank to our operation. The transition to a six-bank hub will give us a significant advantage over our competitors and will further strengthen our competitive position as a premier intra-Latin America hub. By providing our passengers with more and better flight options as we add frequency into the new bank, by permitting significant hedge of improvement to make your destinations in North and South America. And by allowing us to better utilize the Tocumen airport infrastructure, personnel and equipment by spreading out our operations throughout the day.

In addition the growth of operations that will occur by going from four to six banks in June, we expect the Tocumen airport expansion to be completed in the first quarter. The expansion will significantly increase our lead in terms of airport activities, permitting us to grow without infrastructure constrain for the next few years and allowing us to increase our intra-Latin America hub dominance, benefitting from the strength and efficiency of a one-hop strategy with a huge geographic location advantage.

With regard to our 2011 expansion plan, we have already announced four new destinations, which we will launch with four week frequencies each. There are Toronto, our first Canadian destination, Porto Alegre in Brasilia, which increased our Brazilian destinations from four to six. And Nassau, our eleventh city in the Caribbean. These new destinations, as well as additional frequencies to currently served markets, including those added during the second half of last year, are time to coincide with the instrumentation our six-bank hub and will add more connectivity to an already superior network.

We're also working on several initiatives to enhance our product and our passengers experience, some of which we have recently announced, such as our integration into the Star Alliance, we're always on track for joining early next year. In admiration of renewed President's club in Santo Domingo, Dominican Republic. The delivery of our first 737-800's featuring the signature Boeing style interior, the first aircraft in Latin America with this innovative interior design.

And the recent launch for a mobile website, which includes electronic boarding passes that can be accessed from portable electronic devices, making Copa Airline and the Tocumen airport the first in Latin America to accept mobile boarding passes for international flights. These are just a few examples of how we continue to enhance the world-class service for which Copa Airline has become known.

So to summarize, we're very pleased by our first quarter results as well as the many initiatives we're implementing to enhance our product and strengthen our hub of the America's. The recent economic environment remains strong and we're seeing healthy demand strengths, which should allow us to do well even in a high fuel cost environment.

Our 2011 expansion plan and transition to a six-bank hop will further strengthen our hop's leadership for inter-Latin America travel. And finally, we're driving the necessary initiatives to maintain the loyalty and preference of our passengers. That said, we feel we are very well positioned to take advantage of opportunities ahead, while continuing to deliver world-class results. Thank you. Now, I will turn it over to Victor who will go over our first quarter results and full-year guidance in more detail.

Thank you, Pedro, and good morning, everyone. Thanks again for joining us. First and foremost, congratulations again to the whole team for another exceptional quarter, both on the operations front as well as financially speaking. Better mention we're off to a late start for the year with reporting net income for the first quarter coming in at $94.4 million compared to last year's first quarter reported net income of $42.5 million.

Excluding special items, which for the first quarter include a $12.5 million fuel hedge mark-to-market gain, adjusted net income came in at $82 million or EPS of $1.86 for a 31% increase over last year's adjusted net income of $62.7 million. We had another quarter of substantial capacity growth as available [free] miles increased almost 25% year-over-year. The vast majority of which is a result of frequencies added to several markets during the course of the year last year.

However, in terms of departures our year-over-year growth was in fact closer to 10% as a significant portion of the incremental [access] generated during the quarter relate to an 8% year-over-year increase in average [stakes lane]. On the demand side, we continue to see strong overall demand throughout the region, resulting in another quarter of healthy traffic growth, as revenue passenger miles increased more than 20% year-over-year during the quarter.

On the yield front, a 4% increase in yields more than offset the lower load factor we had anticipated for the quarter, resulting in a year-over-year increase in revenues of 0.6%. In terms of revenues, first quarter operating revenues came in strong at $423 million for a 25% year-over-year increase. That's where we were able to increase base fares and fuel surcharges to offset higher fuel costs.

On the expense side, first quarter operating expenses increased 23% year-over-year while on a unit basis cost for available seat miles decreased approximately 1%. However, excluding fuel, unit costs decreased more than 9% year-over-year to $6.6 mainly as a result of capacity growth and an 8% increase in average stakes lane for which allowed for some dilution of overhead costs.

Now turning to our main operating expenses compared to the first quarter of 2010. Fuel expense increased 49% driven by a 20% increase in gallons consumed resulting from increased capacity and a 24% rise in the effective price for a gallon of jet fuel, including a realized hedge gain of $8.3 million in Q1 '11 versus a realized hedge gain of $1.4 million in Q1 2010. Salaries and benefit increase 15% remaining by an overall increase in operating headcount to support additional capacity. Passenger service increased 9% more as a result of an increase in passengers carried.

Commissions increased 23%, mostly as a result of higher passenger revenue base. Reservations and sales increased 15%, the main driver being an increase in passenger revenue. Maintenance, materials and repairs increased 10%, mostly as a result of capacity added. Depreciation increased 27% mainly due to additional aircraft and spares. Flight operation, landing fees and rentals combined increased 10% driven by an increase in the departures and other operating expenses remain unchanged.

Non-operating income and expense total of net non-operating gain of $2.8 million, the main components of which are, a net interest expense of $6.7 million and a $12.5 million fuel hedge mark-to-market gain I mentioned earlier. Regarding operating earnings consolidated operating earnings for the first quarter came in at $101 million, approximately 29% above Q1 2010. While our operating margin came in at 23.9%, which compares to last year's first quarter operating margin of 23% when our effective cost for jet fuel was 24% lower.

Turning to fuel hedges, during the first quarter we had 31% of our volume covered, 22% of which was through jet fuel swap at an average of $2.10 per gallon and 9% with crude oil swap at an average of $79 a barrel. In addition, we currently have in place the following coverage for the second quarter, 26%, two-thirds of which consists of jet fuel swap at an average of $2.09 a gallon and the other one-third constituent of crude oil swaps at an average of $79 a barrel.

For the second half of 2011, approximately 17% is currently covered using jet fuel swap at an average of $1.83 a gallon and the other half consisting of crude oil swaps at an average of $80 a barrel. And with respect to 2012, we currently have hedges for 8% of our projected consumption at an average equivalent price in the range of $83 a barrel.

Now turning to our balance sheet, we continue strengthening our balance sheet as assets reached $2.7 billion by the end of the first quarter while owners equity reached $1.2 billion and debt plus capitalized leases total approximately $1.3 billion. We closed the quarter with just over $1 billion in bank debt, 60% of which is fixed rate debt and the blended rate including fixed and floating rate debts for the first quarter came in at approximately 3.1%. In terms of cash, we continue to benefit from a very strong cash position as we close the quarter with $461 million in cash, short-term and long-term investments, which represents approximately 30% of last four months revenue.

So to summarize, we had another quarter of strong capacity rolls with year-over-year accentuating approximately 25%. We continue to see great momentum on the demand side leading to higher yields, which helped us offset the higher jet fuel costs. Our [external capping] is coming down as anticipated. We have a strong balance sheet and liquidity position to continue funding our growth plan. And as always, our co-workers keep working hard to continue delivering the world class service our passengers expect from us.

In terms of our full-year guidance, in spite higher jet fuel prices projected for the remainder of the year, and in light of the demand trends we're seeing, and furthermore in order to reflect our migration from US GAAP to international financial reporting standards, we're revising our guidance as follows.

We are maintaining our capacity guidance forecast at approximately 20%. We're also maintaining our load factor guidance at plus or minus 74% or refer to 76.9% in 2010. We're raising our [revenue] guidance, approximately 7% from $12.3 in our previous guidance to $13.2 to reflect higher yields, mostly as a result of an increase in both base fares and fuel surcharges.

We are reducing our cash and mix fuel guidance from plus or minus $6.7 to plus or minus $6.6 in order to reflect the [assumption] over our cost in accordance with international financial reporting standards. With respect to fuel, we're now assuming for the year an effective price for a gallon, including into plane and narrow hedges of approximately $3.19 compared to our previous assumption of $2.60 per gallon. And with respect to our operating margin, we still expect to come in within the range of 18% to 20%. Thank you and we'll now turn it over to Pedro for closing remarks.

Thank you, Victor. Now we will turn it over to -- now we will open up the call for some questions.

(Operator Instructions). Our first question comes from Michael Linenberg from Deutsche Bank. Your line is open.

Hey, good morning, guys. A couple questions here. What we heard on Milan call was that they expected to lose I think something like on the order of $25 million at [Aires] this year and they said very much that they were repositioning the brand with the focus on providing a higher quality product and one that would probably have higher yields. And so I know they've only been in the market for a few months, but based on what you're seeing in the Colombian market, does that hold true? Is there some truth in that or can you confirm that?

Well, I didn't listen to their call, but I assume they were talking about what's coming next, about the future of [Ida]. And what we have seen so far is it's kind of the same Ida as before, but they have rationalized their route structure and their fleet and yields have improved, fares have improved. So I would think that must be true, going forward of course.

Michael Linenberg. Okay, and then just on a second question, I noticed with the -- with this reporting, and actually I think you started a month or two ago, you no longer break out the Colombian versus the Panamanian operation. What's behind that and -- yes, what sort of drove that initiative?

Yes, this is Pedro again.

Hi, Pedro.

Yes, it didn't make a lot of sense -- it doesn't make a lot of sense right now to report separate segments as before because we have integrated to a large degree both operations and actually a lot of our hub flying between Colombia and Panama is operated by Copa Colombia. So really the correct -- the right way to report is the way we're doing it now, as an integrated operation. And now so that will drive the right decisions, the right decisions for Copa Holdings. So we will have the earning that can best operate a market operated and not have to break down into segments that are no longer operating that way. Again, we have integrating. If you want to add something, Victor, to that.

Yes, basically it's the same point. The Company has changed dramatically from the Company it was during the past five years. You have one management team reporting to headquarters, as Pedro mentioned the operations are fully integrated. The decision-making is a decision-making process that is looking to optimize or maximize return, the value to shareholders of corporate holdings, the whole company. They contribute significantly to the hop and that will be seen in the segment reporting. And then resource allocation is also likewise, the decision-making process is to again maximize shareholder value for corporate holding shareholders. So it really didn't make sense to continue doing separate reporting the way we look at the business today.

Thanks. That makes a lot of sense and as even evidenced by your very good results, your margins. Thank you.

Thank you.

Our next question comes from Jim Parker from Raymond James. Your line is open.

Good morning, Pedro and Victor and Joe.

Hi, Jim.

Can you help us a little bit with knowing what we are going to compare against in the second and third quarters of 2010 with your new IFRS accounting?

I'm trying to understand your question. Are you -

Well, the question is you have restated, of course, your first quarter a year ago with the results you just reported.

Right.

You also included the fourth quarter, but we don't know what your second and third quarters are of 2010 under IFRS.

Okay, I understand what you're saying, yes. We'll be providing as we move forward on a quarterly basis the comparison versus prior year quarters and you have our guidance, you have our guidance for the year, this year under IFRS and we provided a week or so ago a reconciliation of 2010 US GAAP preliminary results to IFRS. So I think with that you should be able to estimate what the quarterly guidance would be for this year under IFRS. As I think the $23 million or $24 million impact that you saw in the reconciliation of US GAAP results for 2010 can be used as a pretty good proxy of what the impact would be for 2011. So -- and again, when we do our second, third and fourth quarter financial reporting, we'll be comparing against prior year IFRS results.

But I'm curious why you can't make that available now? Because we don't know, how do I forecast, whether earnings will be up or down or what.

Well, yes, again, Jim, you have our full-year guidance. The guidance is under IFRS. We know we have communicated to the market what has changed in the guidance, so our previous guidance which was under US GAAP, you basically have three main drivers. You have the fuel price assumption that changed from $2.60 to $3.19. So obviously, that has an impact on cost. You have RASM going up, that's mostly as a result of higher yields and have an interest in RASM of 7%. And then the IFRS impact on guidance it's really boiled down to the ex-fuel cap and guidance that's slightly lower than what we had before. So with that, I think you should be able to produce a model associated performance for the company that quarter for the year.

Your guidance is real good, it's just the prior year. Okay, let me move along. Your $24 million positive impact from the accounting change. In 2000 -- that's $24 million on 2010 numbers. Are there any non-recurring items in that $24 million that will not show up -- can we use that as a base going forward or are there non-recurring items in that $24 million?

No, you can use that as a base going forward. There are no significant non-recurring items. And as we explained in the -- in our release, it boils down to three or four items. Basically, maintenance, which includes major overhauls but before we were hitting the P&L right away versus now you're capitalizing and amortizing. Comes down to deferred taxes and comes down to an adjustment on [Star] compensation. So that will be going forward a good guy and the $23 million that we saw in 2010 is going to be used as a good proxy for 2011.

Okay, fine. Thank you.

Thank you.

Our next question comes from Duane Pfennigwerth from Evercore Partners. Your line is open.

Hi, good morning, guys.

Morning, Duane.

Hi.

Victor, wondering if you can give us any monthly detail on the RASM growth rates that you saw in the first quarter and any sort of forward look on the second quarter here.

Sure. What we're seeing is a nice improvement in RASM, long as we've had to obviously with fuel surcharges. You know as fuel prices have increased, we've been bumping up fuel surcharges. As you know, the second quarter for us it's our low season, or not-so-high season let's call it. It's actually summing up pretty strong. So you can expect as we've seen in prior years, lower RASM than you would see in the first quarter.

And then it starts picking up in the third and fourth quarter -- third quarter being our high season and fourth quarter being our second-highest season. And don't forget that the growth this year when you look at the second half of the year in terms of growth, in terms of ASM, you comparing to 2010 where most of the growth came in the second part of the year. So -- and that's what takes you to the RASM guidance that we provided earlier.

So just to clarify, there is some acceleration implied in the guidance, but we maybe shouldn't look for that acceleration in the second quarter, we should look for that in the second half when you're ASM growth rate moderates? Is that fair?

That's fair to say, yes.

Okay, great. And then just a follow-up on the IFRS. Can you tell us what capitalized maintenance is expected to be in 2011?

In 2011, we started talking about internal maintenance in looking at an impact of approximately $50 million versus the US GAAP. In other words, what you would be capitalizing what you would otherwise be hitting the P&L with would be about $50 million and that's related to our par by the hour agreement for engine overhauls for CFM engines and have to do with scheduled major events. But otherwise, we would have the P&L on the US GAAP.

That's great. And then just one last little follow-up there. If I remember correctly, your power-by-the-hour covers the Boeing fleet but not the Embraers. Is that going to change? Are you getting another agreement for the Embraers?

That is something that we're currently negotiating. And we'll have news for you hopefully soon. But it's still under negotiations. Yes, we're looking at it right now.

Okay, thanks, guys.

Our next question comes from Nick Sebrell from Morgan Stanley. Your line is open.

Hi, good morning, guys.

Hi Nick.

If you could talk a little bit about how you're managing the growth rate. When we've seen companies grow at 20% or more in capacity in the past, sometimes things become a little bit more challenging because scaling up is not always easy in operations like that. So if you could talk a little bit about A, what you're seeing in labor costs. Are you seeing any inflation pressure? Do you have a readily available source for pilots and things or what are the challenges there? B, what kind of planning and operation bottlenecks do you have or are there really any in the systems that you have can handle scaling up quite well.

And then C, if you could talk about the maintenance aspects and inventory and if there are any issues there and as well as anything I might not have mentioned. And then if you don't mind revisiting the Colombia question in terms of competition. What are you seeing in the competitive environment in Colombia from [AviancaTaca] and what can you do and what can you not do when you're all in the same alliance, when joining the Stars complete? Are you allowed to plan closely capacity and networks and pricing with AviancaTaca when that happens? Thank you.

Okay, I think my answer -- this is Pedro, Nick. I think my answer is going to probably be shorter than your question.

Okay.

So we're turning the tables. And the reason I'm saying this is that our growth, in other words, we are guiding to 20%, approximately 20% growth and we've shown more than that so far this year in the first quarter. It's what I would call [easy] growth in terms of flights it's around 10% additional flights. So a lot has to be with length of whole, longer flights. So our growth in terms of flight this year is not much different than what we have been doing for this past five years on average. And even just in terms of ASM, we've had faster growing years in the past. It's totally manageable for us. We have the personnel and we have the assistance and it's not something that's creating any particular stress in the system or in our team. Obviously, we're all working hard, but we've been doing that for a while now.

Pilots of course, is a key ingredient because we recruit outside of Panama a large percent of our pilots. But so far, we've been able to recruit the pilots we need for our growth and we expect to be able to recruit them in the future also. But we need to adjust our recruitment process and we're ready to do so.

In terms of competition in Colombia, it's -- I would call it business as usual. No major changes. The fares are holding up and actually have improved over last year. AviancaTaca has been reviewing its fleet, but no major changes. Our competitors are growing like they've always done, but at rational rates. And no one is doing anything crazy. And when you think about it, we're in Latin America.

We're down to three or four groups of airlines competing in the intra-Latin America market. So it's a very rational and stabilized environment. And obviously, we have the strongest hub with a very unique geographic position. Once we are in Star Alliance with AviancaTaca, which should happen early 2012, I'm not sure we can make a plan networks and stuff like that. We'll do whatever is allowed by our competition authorities and we'll do frequent flyer and co-chairing, but we have no plans to coordinate networks or fleet or anything like that.

Okay, that's extremely helpful. Thank you, Pedro.

Our next question comes from Helane Becker from Dahlman Rose. Your line is open.

Thanks very much, Operator. Hi, gentlemen. Thanks for taking the question. Can you say what the lag effect is between rising fuel prices and fuel surcharges?

Yes, sure. When you look at our booking curve, you're talking about anywhere between 30 to 45 days. So obviously, you know, the price of fuel goes up, you start adjusting your fuel surcharges and base fares. Whatever you change today, you won't see it until 30 to 45 days from now. By the same token, when fuel prices start coming down, you have that same lag also. So but generally speaking, you're looking at 30 to 45 days lag.

Okay, great. Because you actually answered the second part of my question. Thank you. And then the other question I had is I was going back over the notes from the last call and the guidance that you had given us and you always talked about, I guess 20, 22% capacity growth and now you're seeing 20%, but obviously you grew more than that in the first quarter. And I heard what you answered in the last question with respect to thinking about capacity growth. So you're adding the two banks in June and then you're comps in the second half of the year are really off of the bigger base. So is that really the difference? Are we thinking it's a 20% average or are -- and so that the second half of the year is more like 16% or are we just thinking 20% average?

It's 20% average and when you look at the third and fourth quarter, you're between 19% and 20%. And that --

Okay. It kind of get distorted when you look at on a quarterly basis year-over-year because that's your -- the base ASM's for the first half is dramatically different from the second half because most of the growth that year came in the second half. But at the end when you average it out and the year-over-year growth is 20%.

Okay.

And I should add that we're maintaining our guidance in terms of ASM growth. So there's no change from the previous call.

Okay.

It is the same number.

Okay, that's perfect. Okay, thanks very much for your help, I really appreciate it.

Our next question comes from Stephen Trent from Citigroup. Your line is open.

Hi, good morning. This is actually Angela Lee on behalf of Steve Trent. Would you have any comment about advanced bookings in light of higher oil prices? And then also, just to follow-up on the Colombian market question. Do you have any comments with respect to yields?

Okay, in terms of the advanced bookings, demand looks very strong across the board. We -- even though yields are better in a large degree to reflecting the higher fuel costs to compensate for higher fuel costs. Demand is also very strong, so we're not seeing the manifested, we should be reporting our April traffic very soon, probably Monday morning, first thing Monday. And you'll see that April was extremely strong, was very strong. And that's what we're seeing going forward. So we're not seeing an impact there. And in Col0mbia, yields are better. Yields have stabilized and are much better than last year.

Okay, thanks a lot.

Welcome.

Our next question comes from Dan McKenzie from Rodman and Renshaw. Your line is open.

Hey, good morning, everybody. Yes, I appreciate you probably don't want to make this an accounting reconciliation call, of course, but more broadly, I'm wondering why the decision to switch over to the international financial reporting standards? And more importantly, why was it important to make the change now? And I guess what I'm getting at is that under international financial reporting standards, I believe, or at least according to Ernst and Young, extraordinary items are prohibited, which I would think could potentially introduce earnings volatility that might not be there otherwise. So I guess my question is really why the change, why now, and am I thinking about potential earnings volatility correctly?

Why the change boils down to a couple of things. One is that our subsidiaries are under international financial reporting standards, Copa Airline and Copa Colombia's moving to IFRS as a requirement in Colombia. So it's simply more efficient to have everybody on the international financial reporting standards. The other one, and probably most importantly then is our peers are reporting under IFRS. And at the end of the day we are a Latin carrier.

We're compared against those peers and this will make comparison much easier than having to take US GAAP results and reconcile to a IFRS to then compare against our peers, which I don't know if it was even being done by some analysts. I doubt it was. But now the comparison will be much easier and we'll be on even footing. And with respect to the volatility, I do not expect the volatility of earnings to be effected by this. And I'm not so sure what you're referring to would have that impact and that's not something that we have seen at least in the reporting of our peers, so I don't expect it to be so in our case.

Okay, well, I appreciate that. The second question is a lot easier here. If fuel prices drop, I'm wondering if the fuel surcharges would fall away potentially impacting your full-year revenue outlook. And then if I could squeeze one final one in there, I guess it's just really a productivity question. What would be the change in asset utilization or block hours when you cut over from four banks to six banks?

Let me take the utilization questions first, Dan, this is Victor, and at the end of the day when you look at our forecast utilization for the year, before the migration from four banks to six banks and after, it really doesn't change that much. We are seeing an increase year-over-year in utilization but it's not necessarily a result of the six bank hub. It's a result of our root plan and some tweaks that we made. But we don't expect a significant impact as a result of this migration to six banks in our utilization.

And in terms of revenue, if fuel prices were to drop, some fuel surcharges may be reduced. Most likely, that's what happened in the past. It depends by how much fuel drops. But I think what's important is that that would be good for margins and that should be good for EPS. So the news would be that much better.

Fantastic. Okay, thanks, guys, appreciate it.

Thanks Dan.

Our final question comes from Caio Dias from Santander. Your line is open.

Good morning, Pedro, Victor, Joe. Sorry if my question has already been answered but, guys I jumped late to the call. But anyway, my question is on yields rise. I saw that you were able to increase yields despite the fact that you put some capacity this quarter. And my question, in which specific routes you were able to increase price. For instance, I know that price, ticket price from Brazil to the US charged by our competitors is extremely high. So are you guys gaining market share in the routes coming from or flying from Sao Paulo connecting Panama and then to the US as just one of the examples, or if it's not, where are the fleet -- which routes are the ones that are experiencing the highest demand and so you are able to increase more price?

And my second question is on the cost side. You guys did a very good job reducing cost ex-fuel this quarter. If I'm not wrong, you reported the same cost x-fuel for the quarter as you are guiding for the year. Given the fact you should have further scale gains along the year, isn't $6.6 conservative number? Can we assume there is a downside risk here and you'll be able to report even lower costs for 2011 full year?

I'll answer the first one and then let Victor answer the second, the harder one. I take the easy ones. But we -- we look for opportunities to compensate higher fuel costs and to be honest, it's been across the board. I cannot talk about one specific market. Airlines -- our competitors are a lot more willing right now to either initiate a price adjustment or follow our moves. Even the US market, which are usually extremely competitive and we're passing through our price increases not very easy, we've been following US carriers that have been raising their prices throughout the year, at least since fuel went up. So it's hard to pinpoint one specific market. It's -- again, across the board.

Caio, in regards to our ex-fuel cap on guidance, you have to consider that in the second, third or fourth quarter of the year, you're going to have a much higher fuel price than what you saw in the first quarter. So and we're going to therefore keep pushing fuel surcharges to try to compensate for that additional cost, which means then more revenues and it means then higher distribution costs. So, embedded there is a more efficient ex-fuel [custom] and ex-distribution costs, but maybe you don't see it because it's been offset by the fact that you're spending more in distribution as a result of having to increase revenues to offset the impact fuel -- higher fuel prices are having on the bottom line.

Okay, very clear. Thank you very much and congratulations are required.

Thank you.

Thank you.

That does conclude the Q&A session for today. I will now turn the call to Pedro Heilbron for closing remarks.

Okay, thank you. This concludes our first quarter earnings call. Thank you, all, for being with us. And thank you for your continued support. We'll see you next time and have a great day and a great weekend.

Ladies and gentlemen, that does conclude today's conference. You may all disconnect and have a wonderful day.