Copa Holdings SA (CPA) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Copa Holdings Second 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 August 4, 2011. Now, I would like to turn the conference over to Mr. Joe Putaturo, Director of Investor Relations. Sir, you may begin.

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, our Chief Financial Officer. First Pedro will start with our second quarter highlights, followed by Victor who will discuss our financial results, immediately after we will open up the call from questions from analysts. We kindly request if you could limit yourselves to one question with a brief follow-up so we can accommodate all questions.

Copa Holdings Second Quarter Financial Results have been prepared in accordance with international financial reporting standards. In today's call, we will discuss non-IFRS financial measures, a reconciliation of non-IFRS to IFRS 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 belief, expectation and-or intentions regarding future events and results. These forward-looking statements involve risk and uncertainty that could cause actual results to defer 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, and good morning, everyone. I'm glad you could join us this morning for our second quarter earnings call. As always, my gratitude and recognition goes out to our coworkers for delivering a very strong second quarter, one in which our operating revenues grew more than 40% and in which we delivered an operating margin of 17.6%.

Especially, I would like to thank all those who were involved in making our recent transition to a six-bank hub a huge success. Both congratulations and a job well done. Among the main highlights for the quarter, demand continued on a very positive trend with passenger traffic increasing 28% for the quarter. Our consolidated load factor came in at a very healthy 76.3%. Even more so when you take into account our year-over-year capacity growth, which was above 20%.

On top of that, we saw a very healthy revenue environment as both yields and RASM were significantly higher year-over-year, even with a substantial increase in our average length of haul. This very strong revenue performance, along with a slight year-over-year reduction in ex-fuel CASM allowed us to deliver record second quarter revenues and earnings as well as one of the best operating margins in the industry.

On the operational front, we had a very eventful quarter, highlighted by our transition on June 15 from a four-bank to a six-bank hub operation. The transition to a six-bank hub marks a major milestone in our operation and will give us significant advantage over our competitors. By providing our passengers with more and better flight options, by permitting significant schedule improvement to major destinations in North and South America and by allowing us to better utilize the Tocumen Airport infrastructure, personnel and equipment by spreading our operations throughout the day.

The launch of our six-bank hub was also timed to coincide with the beginning of our 2011 expansion plan. As we launch service to four new cities, Toronto, our first Canadian destination, Porto Alegre in Brasilia, increasing our Brazilian destinations from four to six, and Nassau, our eleventh city in the Caribbean. In addition to these new destinations, we added frequencies to several important cities, including Bogota, Rio de Janeiro, Miami, Mexico City and Santiago.

In short, we have strengthened our hub of the Americas, the leading hub for intra-Latin American travel. And this will continue in December when we expand service to three new additional destinations, Chicago, Asuncion in Paraguay and Cucuta, Colombia, and increase frequencies to even more cities. By year's end our network will serve 57 cities in 28 countries in the Americas, by far the most complete and convenient network for inter-travel Latin American travel.

Also in the operational front, during the quarter in April, we took delivery of one Boeing 737-800. As a result, our fleet at the end of the quarter stood at 66 aircraft; 40 Boeing NG's and 26 Embraer 190's with an average age of less than five years.

In July, we took delivery of our fourth 800 this year, with six more deliveries scheduled before year-end, to end 2011 with a fleet of 73 aircraft. For the quarter, Copa Holdings reported on-time performance of 89.2% and a flight completion factor of 99.2%, which once again places us among the best in the industry and tops in Latin America.

In short, we had a great quarter financially and operationally and are very encouraged with demand trends, and the strength of business travel in our region. As a result of our strong first half and a positive outlook for the rest of the year, we're projecting higher unit revenues, which should help us mitigate the impact of higher fuel costs. The outlook for the region and for Panama in particular continues to be very positive. As a whole, the region's GDP's expected to grow close to 5% in 2011.

In addition, Panama's expected to have another year of outstanding economic growth, forecasted to come in between 8% and 9% as our country consolidates itself as one of the most important trade and business hubs in our region. We believe the economic environment is very favorable, especially in light of our expansion plans, which calls for more than 20% capacity growth this year and similar growth next year.

The continued expansion of our operations will be facilitated by the conclusion of the Tocumen Airport North Terminal expansion in the fourth quarter of this year. The North Terminal would add 12 new jet bridges to an already superior airport infrastructure, and along with our six-bank hub will allow us to execute our planned growth for several years. The new gates will reduce our current use of remote positions and new taxiways, ramp and support areas will expedite the flow of aircraft.

The expanded and more efficient airport, another produce driven initiative, such as the introduction of the Boeing Sky Interior in all of our new deliveries, the expansion of our Panama President's Club and the launch of new [P] clubs in Santo Domingo and Guatemala City.

The recent introduction of our mobile website and electronic boarding passes and our expected entrance into Star Alliance by April next year are all part of our efforts to improve our passenger experience and consolidate our leadership as the preferred airline for intra-Latin America travel.

To summarize, we are very pleased by our second quarter results, especially a successful launch of our six-bank hub. Our demand and revenue outlook for the second half are very positive, supported by healthy regional economic environment, which should allow us to do well, even with higher fuel costs. And finally, we're driving the necessary initiatives to maintain the loyalty and preference of our passengers.

That said, we feel we're very well positioned to take advantage of opportunities ahead while continuing to deliver world-class results. Thank you, now we'll turn it over to Victor, who will go over our second quarter results and full-year guidance in more detail.

Thank you, Pedro, and good morning, everyone. Thanks for joining us today. First, thanks again to the whole team for their efforts and hard work and congratulations on another great quarter.

This morning we are reporting a 40% year-over-year increase in net earnings for the second quarter, as consolidated net income came in at $41.3 million. Excluding a $15 million fuel hedge mark-to-market loss, underlying net earnings came in at $56.6 million or EPS of $1.28 for a 53% increase over last year's adjusted net income of $37 million. We had another quarter of strong growth as we added another aircraft to our fleet, four new destinations to our network and more frequencies to key markets resulting in 23% growth in available seat miles.

With respect to traffic, second quarter traffic growth outpaced capacity growth as revenue passenger miles increased more than 28% year-over-year leading to an increase of 3.2 percentage points in consolidated load factor, which came in at 76.3%. In addition, yields increased more than 11% year-over-year, contributing to a 16% increase in unit revenues or PRASM, as we continue to be successful in our efforts to manage base fares and fuel surcharges in order to offset higher fuel prices.

Strong capacity growth together with rising yields and load factors resulted in strong revenue growth with operating revenues climbing 41% year-over-year to $428 million. On the expense side, second quarter operating expenses increased 36% year-over-year while costs for available seat mile increased 10%. However, excluding fuel, unit costs decreased close to 1% year-over-year to $0.069 mainly as a result of capacity growth and a 9% increase in average [stay's] length.

With respect to our main operating expenses compared to the second quarter of 2010, fuel expense increased 65% as a result of increased capacity and a 38% rise in defective price per gallon of jet fuel including a $9.7 million realized hedge gain in Q2 '11 versus a realized hedge gain of less than $1 million in Q2 '10.

Salaries and benefits increased 24% mainly due to additional headcount to support capacity growth. Passenger servicing increased 26%, mostly as a result of an increase in passengers carried. Commissions increased 30% for the most part due to a higher passenger revenue base. Reservations and sales increased 28%, and the main driver being an increase in passenger revenue.

Maintenance, materials and repairs increased 38%, mostly as a result of capacity added and more engine events during the quarter. Depreciation increased 21% mainly due to additional aircraft and fares. Flight operations, landing fees and rentals increased 10% as a result of additional departures. And other operating expenses decreased $1.5 million.

Moving onto operating earnings, consolidated operating earnings for the second quarter came in at $75.4 million, approximately 73% above Q2 '10, with our operating margin coming in at 17.6%, 3.2 percentage points above last year's second quarter operating margin when our effective cost of jet fuel was 38% lower.

Looking at non-operating income and expense, Q2 generated a net non-operating expense of $24.4 million, mainly consisting of a net interest expense of $6.2 million and a $15 million fuel hedge mark-to-market loss. With respect to our fuel hedges during the second quarter, we had 26% of our volume covered, approximately two-thirds of which was through jet fuel swaps at an average of $2.09 per gallon and another third covered with crude oil swaps on an average of $79 a barrel.

In addition, we currently have in place the following coverage. For the third quarter as of this year, approximately 22%, a third of which was covered using jet fuel swaps at an average of $1.83 a gallon and two-thirds using crude oil swaps at an average of $87 a barrel.

For the fourth quarter of this year, approximately 19% has been covered, 60% of which was covered through crude oil swaps at an average of $84 a barrel with a remainder being covered using jet fuel swaps at an average of $1.83 a gallon. And with respect to next year we currently have hedges for 10% of our projected consumption at an average equivalent price in the range of $87 a barrel.

Now turning to our balance sheet, we ended the quarter with $2.8 billion in assets. Owner's equity reached $1.2 billion. Debt plus capitalized leases total approximately $1.4 billion and our debt-to-equity ratio currently stands at 0.9 times, about half of what it used to be just five years ago.

In terms of debt, we closed the quarter with $1 billion in bank debt, 54% of which is fixed rate debt with a blended rate including fixed and flowing rate debt coming in just below 3%. With respect to cash, we closed the quarter with $456 million in cash, short-term and long-term investments, which is approximately 29% of last 12 months revenues, ample cash would continue funding our expansion plans.

So to summarize, we grew capacity in terms of ASM's 23% year-over-year. We added frequencies to key markets, added four new destinations to our network and transitioned our operation in Panama to a six-bank hub operation. We have the balance sheet and liquidity to continue funding our growth and most of all, as always, our team continues to deliver a world-class product.

In terms of our full-year guidance, given our performance during the second quarter, the economic outlook in the region and air travel demand trends we're updating our guidance as follows. We're increasing our capacity forecast from plus or minus 20% to plus or minus 21%. We're also increasing our load factor guidance from plus or minus 74% to plus or minus 75%. We're raising our RASM guidance, approximately 4% from plus or minus $13.2 to plus or minus $13.7 to reflect higher expected yields and load factors.

We're also raising our CASM ex-fuel guidance from plus or minus $0.066 to plus or minus $0.067 in order to reflect costs related to generating increased revenues as per our new RASM guidance. With respect to fuel, we're now assuming for the year an effective price per gallon including into plane and narrow hedges of approximately $3.25 compared to our previous assumption of $3.19 per gallon. And with respect to our operating margin, we are revising our guidance from a range of 18% to 20% to a new operating margin guidance of a range of 19% to 21%. Thank you and with that, I'll turn it over to Pedro for closing remarks.

Thank you, Victor. Now we will open up the call for some questions.

Thank you. (Operator Instructions). Our first question is from Jim Parker of Raymond James. Your question, please.

Good morning, Pedro, Victor and Joe.

Morning, Jim.

Morning, Jim.

I was very pleasantly surprised with the strength in your unit revenue. I'm curious, and of course that's in the seasonally weakest quarter of the year, I'm curious if you were surprised with that?

As you know, we see things a little bit ahead of time, so we have advanced bookings and so we have some visibility into the very near future. So we were not overly surprised and we have seen how Latin America and our markets in particular have continued to strengthen this year. But maybe if we had thought six months ago, then we would have been a little bit more surprised.

Now, are you seeing this strength in the second quarter is continuing and perhaps not, because you're actually suggesting that load factor in the second half of the year may be down.

Well, -- this is Victor, Jim, how are you?

Morning.

I think you need to consider the fact that the heavy growth in terms of ASMs actually is ahead of us, it's coming in the second half of the year. It's a little bit distorting when you look at quarterly ASM growth year-over-year because if you remember last year the heavy growth came in the second half, so you're comparing against a higher base. In the third quarter of this year, we're actually growing 10% ASMs versus second quarter. And in the fourth quarter of this year, we're growing another 5%, versus the third quarter. So considering that, we do believe that you have to reflect that load factor guidance that stays under consideration.

However, our RASM guidance for the year is up 4% versus what we gave you before. And if you look at RASM by quarter for third or fourth quarter, it is not that different. It's a little bit higher than actually what you saw in the first and second quarter of this year, if you do the numbers. So I think that the short answer is we expect demand to remain strong, but you do have a lot more capacity being deployed in the second half of the year.

Okay, thank you.

Thank you. Our next question is from Nick Sebrell of Morgan Stanley. Your question, please.

Hi, gentlemen. I was hoping you'd talk about the fleet a little bit. Obviously, with 20% plus growth this year and slowly getting visibility to next year, I mean we know what your fleet plan looks like, but you've been surprising to the upside. So thinking about any follow-on orders to the 737, A, do you see any opportunity next year that you might have to raise the fleet plan, maybe not for next year but in out years?

And B, what do you think about the announcement that Boeing made of re-engining the 737, you know associated with the American order? I know probably there's limited things you can say, but inasmuch as we can understand what -- how you feel about a new engine versus a new design versus another option.

Okay, good morning, Nick, this is Pedro.

Morning.

Well, first, next year we're taking delivery of 13 aircraft and we're planning to return three leased aircraft, so that's a net of 10 will be at the same net number as this year. After that, we have a similar number in 2013 and that number comes down a little or in 2014 and 2015.

So if we see markets behaving the way they have up to now, there's always a possibility that we could lease additional aircraft for 2013 and beyond to supplement what we have on order. But what we have an interesting number of firm orders and options for those years. But we could supplement for -- would lease it 2013 and beyond, not for next year with 13 deliveries next year, we're okay.

Yes.

In terms of the new Boeing aircraft, well, we need something starting in 2018 and beyond. We have lots of options in 2018. We have nothing order after 2018, so as of 2019 we will need to order new aircraft. And we're obviously very interested in any new developments, but we do not know enough right now about that new Boeing aircraft.

We're going to be meeting with them in the coming weeks and we hope to you know gather enough information as to be in a position to make a decision. I don't know if it's going to happen overnight, but again, we still need to learn a lot more about this aircraft. And yes, we -- we're an interested party.

Do you think there's any opportunity for you to impact any design changes or updates in the aircraft?

We think --

After saying you're a significant customer.

We definitely think so. Not only from the standpoint of being a significant customer, but also given how we operate the aircraft. We basically operate the 737 NG to kind of its maximum performance limits. So we have particular needs that will be of interest, I think they're of interest to us and to Boeing. So the signals we have received is that yes, we could have -- we could be having a significant role.

Interesting. Thank you, Pedro.

Thank you.

Thank you. Our next question is from Duane Pfennigwerth of Evercore Partners. Your question, please.

Hi, good morning.

Morning, Duane.

Congrats on the revenue trends here. Wanted to follow up to Jim's question on sort of seasonality and is there something about the network that's changed that has de-seasonalized it?

Meaning -- hi, Duane, it's Victor. Well, I guess your question arises from the fact that the second quarter came in so strong. I think you know it's hard to say. Generally speaking the second quarter is always our low season, always has been our low season. I think in the future, it will probably be -- continue to be our low season.

So we saw very strong demand through the second quarter, it's hard to say whether, you know -- whether next year we'll see the same strong demand. Also, you have to consider that the conferences last year is somewhat easy because last year's second quarter was affected by Colombia and [Idis] and it was really soft. So it makes this quarter, this second quarter look especially strong. So I don't think -- my short answer would be I don't think we have done anything structurally to de-seasonalize our patterns.

But I would add to that is that you know the markets we serve, the base of business travelers, et cetera, has always led to a low, what we can call a lower season quarter for our second quarter, but never a weak low season. I mean we've always had a positive numbers and double-digit operating margins, even in our seasonally lower season second quarter.

Appreciate that. I'm thinking from the perspective of the implications for the rest of the year and specifically do you still expect what you normally see in terms of the seasonal uplift in revenue trends from 2Q into 3Q.

Okay, and this is Victor again, Duane. Yes, but I think you need to consider again what I mentioned earlier to Jim that you have a lot of ASMs that are being deployed in the second half of this year. Part of it has to do with starting four new destinations. We added four new destinations to our network in June. That's something we're going to have to carry for the next few quarters.

You know new destinations take time to develop. We've been doing pretty well over recent years, but they are new destinations. We also have frequencies, several frequencies to key markets that we added also in the second quarter that you're going to see that develop during the remainder of the year. So you have that that you need to consider and then the fact that you are heading into the high season, which is a third quarter -- and the fourth quarter's also pretty strong. And that's how we're coming up with that guidance we're providing.

Okay, thank you.

Thank you. Our next question is from Ray Neidl of Maxim Group. Your question please.

Yes, congratulations, fantastic quarter. I don't think there's too much more to be said about how you're performing and growing. I'm just wondering other sources of potential revenue that you can leverage off of this. You're expanding the Panama City airport quite aggressively, there's a lot of land around there. There's going to be another phase of growth probably in three or four years, which I know you're going to participate in. Do you -- do you see any future participating in the development around the airports, such as new hotels, condos, office buildings?

And secondly, I believe that Panama could be a prime location for an air freight terminal. Is there any thoughts about investing in a subsidiary that might move in that direction as well without affecting your main airline?

Okay, it's Pedro, Ray. We do expect a lot of growth and development in the areas you have just mentioned. Actually, the airport just purchased a large piece of land right next to it, which belonged to the government. However, we do not expect ourselves to be involved directly in those investments. I think we're going to continue to focus our resources and our time in developing the airline. But we know there's a lot of interest in developing hotels, convention centers, a business park, et cetera around the airport.

The airport is a government-owned corporation. It operates as a independent corporation, but its government owned. And they do have the flexibility to get involved in those projects, although they will probably do concessions or a similar arrangement. The cargo terminal is also interesting and we think Panama has potential, but it's not our expertise. It's not what we do best. We have our resources taken up by the passenger side and we think we're going to stay true to that vision.

Okay, great. One specific question on the Company. You mention your fuel hedge positions, which are pretty light. I think when you were in New York a couple of months ago, you said that the hedges were less important, that you're more important strategy for controlling fuel costs was doing fuel surcharges, which are open in many of your markets, plus the fact that you want to keep the fleet modern. Is that pretty much the strategy?

That is pretty much the strategy. Ray, this is Victor. But we still you know have our hedging strategy that we think has been working just fine over the past seven, eight years. We're going to continue to enter into hedges and hedge up to 25% of the volume looking forward 12 to 18 months and then use a combination of swaps, using crude oil and jet fuel swaps. So we'll continue doing that. But I think the fact remains that given demand trends and given the pricing environment, we feel less pressured to go much above that 25% level that I just mentioned because we do have the flexibility for our policy to go higher than 25% up to 50% on a discretionary basis.

Okay, great. Thank you, guys.

Thank you.

Thanks, Ray.

Thank you. Our next question is from [Tias Coria] with Goldman Sachs. Your question, please.

Hi, good morning, Joe, Pedro and Victor. Actually looking to these revenue trends that have been showing. I wonder if you could give more details on the pricing strategy. How do you see elasticity of demand to prices giving increased yields by more than 10% year-on-year? We understand that was part of fuel price surcharges strategy, but going forward how do you see if there's room for further increasing fares aside from fuel increases or even on the flip side, how much more do you think RPM can be extended through yield stimulus? Any way to further maximize rev by increasing load factors? You know, could you give more color on that please?

Yes, it's Pedro. There's obviously a combination of factors influencing our improvement in unit revenues. Obviously, the price of fuel forces many to look at opportunities to improve unit revenues. It makes it easier for competitors to match price increases, which is not always the case. Also, we've had very strong demand throughout our market. Demand allows you to implement better pricing and also to be more effective in revenue managing our capacity.

So that combination of factors I would say is what has happened up to now and we do not see that changing going forward, at least not for the rest of the year. We see a healthy demand environment. Hopefully, fuel will stabilize, but -- you know we are positive on what we're seeing right now.

Okay, thank you.

Thank you. (Operator Instructions). Our next question is from Michael Linenberg with Deutsche Bank. Your question, please.

Yes, hey, good morning, guys.

Good morning, Mike.

Quick question here just on the ramp-up of new cities. How has that changed given the growth of the hub? You've been much more active in adding new destinations and I'm sure in the past, you know, there are maybe initially losses that you incur. And so at times, you have to be somewhat -- you have to be somewhat modest in the number of new destinations. But it seems like you have picked up the rate of additions as the hub has grown. And I'm just -- I'm wondering if the ramp up is actually a lot faster today because the hub and spoke in Panama is much more robust as a connecting complex than what is was, you know, even as recently as just a few years ago.

Yes, hi, Mike, this is Pedro. If we look at our average of new destinations per year for the past five or six years, it's probably going to be around five per year or something like it.

What happened is that in '09 and 2010, we didn't open any new destination. We just opened St. Maarten at the end of 2010, nothing in '09. So again, one at the end of 2010 in two years. So we're kind of catching up.

And we did that on purpose after the '08 financial crisis. We decided to be on the conservative side, consolidate what we had opened in the previous three years where we opened around 15 new destinations. So we spent two years consolidating that. But we had some pent-up demand. Some of the market we had been analyzing for a while.

And also, you know there's strong growth in Latin America right now, so it's the right timing. So I would say it's that more than anything. This is a market that we've been waiting to fly for a while, and it's just the time right now.

Okay, that's helpful. And then, just my second question, can you just update us on maybe dynamics in the Colombian market and when you look at your own business, where is your split today domestic versus international and sort of where do you think the Copa Colombia unit will be over the next twelve months in that regard?

Well, if you look at what we're doing right now and at our traffic figures for the quarter, we have reduced our domestic ASM's in Colombia and obviously increased international quite a bit. So that leaves us with kind of the following picture. We have a domestic presence, which is enough to serve our passengers, our frequent travelers et cetera. But it's not a growing domestic presence. Again, it has actually shrunk some -- a little. We're very strong Colombia to Panama, so we've been adding cities. At the end of the year, we have added frequencies. And we have a niche, a small niche international operation out of Bogota.

And we don't see that changing much in the coming months. Colombia is a very, very important market for us. Copa Colombia plays a key role, but again, it's going to be a small but reasonable domestic presence, a niche international operation, and a very strong Colombia to Panama hub network. And you know yields are better in the domestic market, as you know. And the country's doing okay. So we're satisfied with our positioning there.

Okay, very good then. Thank you, great quarter.

Thanks.

Thanks.

Thank you. Our next question is from Dan McKenzie with Rodman and Renshaw. Your question, please.

Hi, good morning, guys.

Morning, Dan.

A glance at the schedule's data suggests that incoming competitive capacity is greater in the back half of the year relative to the first half. And it looks like it's from both Avianca and Aires or maybe I should call Aires, LAN, now. And I know you're citing increased demand, but how confident are you that the increased demand can outstrip the competitive capacity. And I guess in other words, does a revised outlook factor in what could be perhaps weaker pricing in a number of markets?

Well, we are -- we have our niche and we're staying there, where our niche is and we're not -- we're -- and so we have reduced domestic capacity. We have strength in our Colombia to Panama hub service and so we have actually moved away somewhat from the competition in the domestic market that Avianca and LAN are producing. So you know we do not -- we're not forecasting a negative impact on our yields or in general our Colombia revenues and actually we think we made the necessary moves to avoid that.

This is Victor, and again, if you look at our RASM guidance today, we increased RASM guidance by 4%. We do expect yields to remain strong, but don't forget that we also raised our projection vis-a-vis fuel prices from $3.19 to $3.25. So obviously that's going to have an impact in the second half of the year.

We'll have to see what fuel prices come in at. Today the prices were down, but the [crack] has been up, so very tough to project fuel prices for the next six months, even for the next two months. But that's probably having an impact in your financial projections, you know, higher fuel prices. But prices, we do expect to remain strong.

Okay, so you know it sounds like your -- kind of your network planning team has checked all the boxes here. But you know -- I guess coming at that same question slightly different. Is it because that you know 75% of your markets have 20 or fewer passengers each way that -- is that's what's giving you confidence in the pricing backdrop and the ability to raise that pricing? Is it the fact that your -- I don't know, I don't want to say monopoly in 75% of your markets, but is that really as we think about the Copa business model, what's going to continue to drive margins as we look ahead?

Right now I would say that it has more to do with the strength of the economies in Latin America and how we have a middle class that's growing and flying more. A business traffic -- it's very strong. There's more commerce among our countries. There's just a lot of economic activity in our region and traveling -- air travel is very important in a continent that has no good roads and no good road connectivity, lack of train service, et cetera. So we are the way you do business in Latin America and we connect a bunch of countries that don't have a better option. So all of -- you know it's that combined with the strength of the economy.

And to add to that, that combined also with what we think is probably the most convenient hub in the region and a world-class product with suburb on-time performance and great customer service. You combine all that, you will get your passengers coming in and filling your planes at a decent fare.

Okay, thanks. I appreciate that. And I'll just add to your point, the roads that are there, from personal experience, are not necessarily safe. So, anyways. Thanks a lot, you guys, appreciate it.

Thanks, Dan.

Thank you. Our next question is from Helane Becker of Dahlman Rose. Your question, please.

Thanks very much, Operator. Hi, guys. Two questions. One, are there any capacity issues around El Dorado Airport that would affect you that might limit any long-haul growth you might want to do? And my second question is with respect to your employees, I think at one point last year there was some negotiation going on and I just wondered if that had concluded and where things are with labor? Thank you.

Okay, so El Dorado is -- it's very restricted of course. It will not have a major effect on us mainly due -- again as mentioned before, we have reduced our domestic flying out of Bogota, El Dorado. So actually we're in a slightly better position than we were before. And we're not planning to grow internationally out of that airport. But it is very restricted, there's no room to grow there actually during peak times at least very limited.

But again, our growth is mainly out of Panama City, the airport is growing here. It has great facilities and we have all the capacity we need to continue to grow in the coming years. So in that sense, we're in a very good position. And actually what you have mentioned is that advantage we have.

Labor.

Okay, in terms of labor, we have no negotiations going on right now and we have very good labor -- relations with our labor groups. We have good communications and I mean labor is -- it's a permanent job, you always have to deal with it. You always have to listen to their needs. You always have to have good communication, so it's not something that goes away that you fix one day and you think there will be no issues the following day. But given all of that, we have very good relations, open communications and I am positive that that's going to continue that way in the future.

Okay, thank you. Are there any plans to -- I think when we were down there a while back at the second to last analyst meeting, there was some discussion about building a train or maybe mass transit from the airport to downtown Panama City. Anything up with that?

The country's building a new metro system in the city of Panama, so that's going on. It's a major investment. We think it's going to transform our city for the better. They're building the first line and the first line will not reach the airport. Maybe future lines, but not this first investment.

Okay. Thank you for your help.

Thank you.

Thank you. Our next question is from Stephen Trent of Citigroup. Your question, please.

Thank you. Good morning, gentlemen. Most of my questions have answered, but one or two if I may. If you could please refresh my memory, I believe there is a second airport somewhere close to Panama City, maybe it's an old US military airport. Am I correct in saying that Copa has the right to use that airport in the event, heaven forbid that something goes wrong at Tocumen?

That is correct. That's Howard Air Force Base, which was a large US Air Force Base some years ago. The -- the runway is in perfect condition and we actually use it today as an alternate. We're basically the only users. And there's also a maintenance facility there owned by Singapore Technologies. So yes, that airport could be used as a backup.

Perfect, Victor. Thank you. And just one last question, looking at your advanced bookings and what have you, are you seeing any sort of shift out of your advanced bookings coming from North America? And -- sort of broadly speaking, roughly how much revenue do you generate out of North America specifically? Thanks.

This is Victor, Steve. What we see from North America is pretty strong traffic trends and we've been seeing that for several months now. Right now, North America represents probably at least 12% of our sales by point of sale. So it's an interesting mix of our revenues. As you know, we added Toronto to our mix of destinations in North America in June. We'll see how that goes. And we operate already to JFK, DC, Miami, Orlando and L.A. So -- and don't forget that we plan to start Chicago in December. So we -- it's probably 11%, 12% right now.

Okay, perfect. Thanks, Victor. That's it for me.

Thank you.

Thank you. Our next question is from Bob McAdoo with Avondale Partners. Your question, please.

Good morning, guys. Just quickly about competition, whatever, obviously we -- you know a year or so ago we had the problem with low fare carrier in Colombia. And as I understand now that that's gone with LAN owning them. Is there any place else in your system where you see low fare competitors who might be starting up?

Obviously, within Brazil we have -- it seems like more and more people trying to start airlines and I think -- and the world is starting to recognize that Latin America, as you say, doesn't have the roads and the trains. But is there anybody else out there that you see is starting up an airline that may be somebody we should be watching to -- that might be causing problems down the road?

We do not see it right now. There are a number of low-cost carriers as you mentioned already. We -- cannot tell there is anything planned right now. We cannot see it. And the conditions in our region are kind of different than other parts of the world in the sense that there are only a few large enough countries, then internationally you would have to fly to the same airports, paying the same costs that everybody else, so you wouldn't have an advantage there.

But again, you know, you never know. There -- that's something that's very, very hard to predict. But in general, we think we have a very healthy competitive environment right now in Latin America. We have a number of strong carriers, but they're all rational and we do not have tens of weak carriers trying to fight for the last passenger. So I think we have a healthy environment. There's good competition, but it's not excessive.

And the irrationality is gone out of domestic Colombia now, that's correct?

For the time being, yes.

For the time being, okay. All right, thanks a lot and great job.

Okay.

Thanks.

Thank you. I'm showing no further questions in the cue at this time. I would now like to turn the conference back over to Mr. Pedro Heilbron for any further remarks.

Okay, thank you all. This concludes our second quarter earnings call. Thank you for being with us and we'll see you the next time. Have a great day.

Ladies and gentlemen, thank you for your participation. That concludes the conference. You may disconnect and have a wonderful day.