Copa Holdings SA (CPA) 2014 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Copa Holdings first quarter earnings call. (Operator Instructions)

As a reminder, this call is being webcast and recorded on May 8, 2014.

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

Thank you very much Jonathan, and welcome everyone to our first quarter earnings call. Joining us today are Pedro Heilbron, CEO of Copa Holdings; and Jose Montero, our Chief Financial Officer.

First, Pedro will start with our first quarter highlights followed by Jose, who will discuss our financial results. Immediately after we will open up the call for questions from analysts.

Copa Holdings' first 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 first-quarter earnings release, which has been posted on the Company's website copa.com.

In addition, our discussion will contain forward-looking statements not limited to historical facts that reflect the Company's current beliefs, expectations, and/or intentions regarding future events and results. These forward-looking statements involve risks 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 Rafael. Good morning to all, and thank you for participating in our first quarter earnings call.

I first want to congratulate all of my coworkers for another outstanding quarter. As you can see from our first-quarter earnings release, we're off to a very good start for the year.

Among our main highlights, available seat miles increased 9% year over year; passenger traffic grew 11% improving our load factor by 1.2 percentage points to 78% as a result of healthy demand trend throughout our network.

This resulted in a positive revenue environment as yield and unit revenues RASM came in higher year over year. At the same time our ex-fuel unit cost came in at a very competitive $0.066, which was in line with our expectations for the quarter.

As a result we delivered an operating margin of 24.8% representing a year over year and quarter over quarter margin expansion being seasonally one of our strongest quarters. On top of this strong financial result, we also continued delivering a world-class product with system-wide on-time performance for the quarter coming in above 92%, roughly 2 percentage points higher year over year and among the best in the industry.

Our first quarter performance was quite strong and the network is performing very well. Lower capacity growth year over year has been positive for unit revenues. Nevertheless, one must keep in mind that the first quarter result included strong Venezuela revenues, a market with higher average demand and thus higher yields than the network average.

A large portion of these revenues were the result of forward sales made in the second half of 2013. Given that the economic situation in Venezuela is not improving and that the airline industry still holds approximately $3.9 billion, we have announced capacity reductions as of the second quarter.

This right-sizing of capacity which represents approximately a 40% reduction in seats shall substantially reduce our exposure and minimize the accumulation of bolivars going forward, while at the same time continuing to serve the Venezuelan market with frequent and reliable service.

Turning to the rest of the network, for this year we expect capacity growth of 10%. We plan to receive eight new 737-800 aircraft of which one was already delivered late March and another one in early April.

The capacity we are adding this year will include new destinations having already announced three of them starting service by July, and possibly more coming later in the year. Nonetheless, overall the additional capacity will be more focused on additional frequencies.

As we announced earlier in the year, our expansion plan for the first half of 2014 includes three new destinations; Montreal, our second Canadian destination; Fort Lauderdale, our 10th city in the US; and Georgetown, Guyana which will become the 30th country we serve. This market has very little connectivity to Latin America and we're confident they will perform well and contribute to the strength of our network.

In addition to these new frequencies and destinations, we will also add frequencies to a number of cities such as an eight daily frequency to Panama, from Panama to Bogota, and a second daily to San Andres, Colombia.

Mexico City will get a fifth daily flight and Cancun seven. In Ecuador, both Quito and Guayaquil will go from three to four daily frequencies. And Brasilia and Aruba will go from daily to twice daily flights.

I'm pleased to say that the Tocumen airport south terminal expansion which will add another 20 jet bridges to our connecting transfers in the second half of 2016 is progressing nicely and is slightly ahead of schedule. The designing has the capability of adding an additional 10 jet bridges in a following phase. This project will keep the Tocumen airport at the forefront of airport capacity in our region and will ensure that (inaudible) has the necessary infrastructure to accommodate our future needs.

Turning to the economic environment, we expect another year of steady growth for our region with GDP for Latin America expected to expand approximately by 2.7% driven mainly by Mexico and Brazil which are expected to grow roughly 3% and 2% respectively.

Countries such as Panama, Peru, Bolivia, Colombia, The Dominican Republic, and Ecuador are leading the growth forecast for the region and are expected to surpass 4% growth. In fact, this year Panama is again expected to be the fastest growing economy in Latin America with GDP forecasted to expand above 7%.

Panama's economy continues to be supported by large public infrastructure projects, a healthy and growing financial sector, as well as a very strong domestic demand which is being supported by growing middle class and expanding tourism industry and a large influx of multinational corporations for establishing the regional headquarters in Panama.

So to summarize, we're very pleased by our first quarter results. Our team continues to deliver world-class operational performance. The regional economic environment remains healthy which is evident in the strong demand trends we're seeing.

We have taken steps to mitigate the Venezuelan currency risk reducing capacity to the market and expect to substantially reduce the accumulation of bolivars going forward. And in spite of our capacity reductions in Venezuela, we're confident in our business model and our team stability to deliver another year of healthy growth and industry-leading result.

Thank you. Now Jose will go over our financial results.

Thank you Pedro, and good morning everyone. Thanks again for joining us. I also want to congratulate our entire team for their efforts.

We had a very strong first quarter and we're off to a good start for the year as we expanded capacity by 9% and revenues by 11%. We're able to maintain very competitive unit cost and continue strengthening our Company's financial position.

Getting to our financial results, net earnings for the quarter came in at $151.4 million, or earnings per share of $3.41, compared to last year's first quarter net income of $113.8 million, or earnings per share of $2.56.

However, excluding a fuel hedge mark-to-market loss of $3.4 million and a $1.2 million gain related to valuation of Venezuelan SICAD 1 rate at the close of March, underlying net income for the quarter came in at $153.6 million, or earnings per share of $3.46, close to a 24% year-over-year increase compared to last year's first quarter underlying net income, $124.4 million, or adjusted earnings per share of $2.80.

In respect to traffic, we continue to see strong demand for air travel throughout our network as revenue passenger miles increased 11% year over year, and a 9.3% capacity expansion. As a result, we delivered a very healthy load factor 78.1% for the quarter. The strong momentum allows us to improve our yields 0.5% year to year.

With regards to (inaudible) PRASM increased 2.1% year over year, and adjusting for a 3.7% increase in length of haul, PRASM actually increased nearly 4% over 2013. Operating revenues for the quarter came in at almost $714 million, an 11.3% year over year increase continuing our strong revenue performance.

On the expense side, we have also have solid results. First quarter operating expenses increased approximately 7.6% year over year. Cost per available seat mile decreased roughly 1.5%. CASM excluding fuel came in at $.066 representing a slight increase year over year in line with expectations.

Keep in mind that even though our first quarter CASM ex-fuel came in lower than guidance and the previous quarter, there's some timing consideration which will impact some of the cost lines later in the year. So we are keeping our CASM guidance unchanged for the year.

Regards to operating earnings as a result of lower unit cost and higher unit revenues, consolidated operating earnings for the quarter came in at $177 million, a 24% year over increase. This translates to an operating margin of 24.8%, almost 3.5% year over year.

In terms of non-operating income and expense, first-quarter results reflect a net non-operating expense approximately $3.3 million consisting mainly of a net interest expense of $3.4 million and another net non-operating gain of $21 million which includes the $3.4 million fuel hedge mark-to-market loss and a $1.2 million gain related to [revaluation] in Venezuela.

With respect to fuel hedges, we ended the first quarter with hedges for 25% of the projected volume for the year, using crude oil swaps for 50% of our projected volume at an average price of $9 per barrel and jet fuel swaps for 10% of our projected volume at an average equivalent price $2.81 per gallon. In addition, for 2015, we have approximately 14% cover, mainly with jet fuel swaps at slightly lower prices.

Turning to our balance sheet, we can report that cash and cash equivalents at the end of the quarter totaled $1.1 billion; represents 41% of last 12 months revenues. Even excluding cash in Venezuela, cash and cash equivalents represented healthy 23% or last 12 months revenues.

Pedro mentioned we anticipate that the capacity reductions in Venezuela will substantially mitigate our Venezuelan bolivar exposure going forward by reducing the accumulation of bolivars to a minimum as of the third quarter of this year. We also maintain a very favorable position in terms of leverage with a total debt to equity ratio of 0.5 times.

In terms of debt, we closed the quarter with approximately $1 billion in bank debt, approximately half of which is fixed rate debt, the blended rate including fixed and flowing rate debt coming in close to 2.4%. Additionally, we have already secured our financing needs for 2014 to a sale-leaseback of four 737-800s which were direct orders from Boeing and we have mandated financing for the remaining four 737-800s via Japanese operating leases with call options, or JOLCO.

In terms of fleet, during the quarter we received one of our eight scheduled 737 deliveries. So we ended the quarter with a fleet of 91 aircraft; 47 737-800s, 18 737-700s, and 26 Embraer 190s.

Turning to our future aircraft deliveries, in the remainder of the year we have seven scheduled; two in second quarter, one of which was already delivered in April; three in the third quarter; and two in the fourth quarter. We will end the year with a fleet of 98 aircraft with an average age of approximately six years.

We're also pleased to mention that all deliveries this year will be equipped with the new Split Scimitar Winglets which will reduce fuel burn of these aircraft by approximately 1.7% versus our current blended winglets. (Inaudible) these aircraft, we expect to retrofit these new winglets on a number of 737s already in our fleet.

We shouldn't continue to improve our fleets overall fuel consumption. As you can see, we are making the necessary investments to sustain our growth and the overall cost efficiency of our fleet.

So to recap, we had another quarter with strong capacity and revenue growth. Our financial position is very solid and we're positioned for what should be another year with strong orders.

In terms of organics for 2014, sharing our performance during the first quarter, the economic outlook in the region, demand trends, and the situation in Venezuela, we're maintaining our guidance as follows. We're maintaining our capacity growth in terms of ASMs of plus or minus 10%. Load factor is expected to come in at plus or minus 77%.

We're maintaining our RASM guidance at $0.137. We're maintaining our CASM ex-fuel guidance at plus or minus $0.068. We're maintaining our fuel price assumption for the year at a effective price per gallon including into-plane and net of hedges approximately $3.15. And with respect to our operating margin, say early in the year, given that what we know today we are in line with our guidance of 19% to 21% for the year.

Keep in mind that under the current scenario we expect capacity reductions in Venezuela to have an impact on our margins of no more than 1 percentage point for the year. However, we should still be within our operating margin guidance.

Thank you and with that I'll turn it over to Pedro for closing remarks.

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

(Operator Instructions) Helane Becker, Cowen.

Just one question, I noticed the other day that there was a big change in the election and in the government and I'm wondering how that affects you if at all, your business if at all?

Okay, this is Pedro here Helane. Well, first of all, it will not affect us in the sense that all three of the leading candidate were pro-business, have kind of the same economic plans, and would have executed in a very similar way.

So there was never a worry of like change of directions for the country. And I should also highlight something that we think it's -- very special about our elections in that over 75% of the population votes. The doors close at 4:00 PM and minutes after that we're seeing live on TV the results coming in.

By 7:30 PM a winner is declared. By 8:00 PM the other candidate accepts the results and there isn't a single incident of violence or anything like it throughout the whole day. So it was really great day for Panama and again the winning candidate which is from an opposition party is going to continue doing the same kind of pro-business policy that we're accustomed to. So no changes in that respect.

Okay. And then are there -- is there anything else we should be concerned about in any place else in Latin America or South America where there's currency issues, or no, are we okay with all the other markets you guys fly in and out of?

Yes, we don't have any special concern right now other than what we already know, what we're already dealing with. No -- so no new surprise there.

Okay. Awesome. Thanks very much for the time.

Thank you.

Hunter Keay, Wolfe Research.

So when you think about the planning for things like aircraft financing, cash deployment, whether it's dividend or repurchases, do you just assume that you're not going to get any of that cash back from Venezuela?

And if I -- also related to that question, if I see your Venezuela cash build by that $200 million over the course of the year, should I just subtract that out to get a good like sort of realistic free cash flow number that you guys expect to plan on a baseline free cash going forward?

I'll take the first -- this is Pedro take the first part of the question, but we have a strong cash -- a very strong cash position at -- is an serious strong position even if we discount the Venezuela -- what's in Venezuelan bolivar. However, I mean in theory we can continue with all our plans and investment just with what is outside of Venezuela.

However we do expect to get paid and at one point we will get paid. So we're being patient and you know that's our money, we just need the authorization to exchange it into dollars and that will have to happen sooner or later. So that's still our expectation. That hasn't changed.

Yes, I'm sorry, and in terms of the way that we do our planning for cash deployment et cetera, we take into account -- we like to stress-test our balance sheet and understand how all the decisions that we make affect this even without having necessarily at least in immediate term the Venezuela funds, but nevertheless as Pedro mentioned, we fully expect to get our cash out of there still at one point.

You do? Okay, great. Thanks for that. And can you give me your updated thoughts just sort of where you guys have preferred dividend has been required (inaudible), just philosophically, given the volatility, the stock price over the last six months, can you give us an updated take, Pedro, on, I'm sorry, philosophically how you think about the existence of a share buyback program?

Yes, I'm -- Jose here; so as you know we have -- for last year we moved from 30% dividend payout to a 40% dividend payout. And we are constantly looking at alternatives to return value to our shareholders so -- and certainly that is one of them, and we are in that process of evaluating what is the best for our shareholders. So we will certainly keep you abreast of this as it moves on.

Okay, thank you.

Eduardo Couto, Morgan Stanley.

Two questions from my side. First regarding the -- your carrying capacity in Venezuela, so what routes are you adding capacity to offset this lower capacity in Venezuela and still grow the 10% guidance for this year?

Well, the way -- this is Pedro here. It's hard to give you a specific route because what -- we have released more or less one-and-a-half aircraft. (Inaudible) we have down-gauged the aircraft. So obviously the aircraft, the slightly larger aircraft we're taking out of Venezuela are going to go to markets where we have a higher demand.

And then the one-and-a-half aircraft we're releasing are going to be adding frequencies again in market where we have higher demand. But these are frequency increases that are throughout the network. So it's hard to -- and we have new aircraft coming in which we already -- we are also adding frequencies with.

So it's hard to pinpoint which one is with the Venezuelan aircraft, which one is with our new aircraft, but they're all going to add in frequencies our up-gauging aircraft in our high demand route. And believe me we have plenty of those and that's why the negative impact in our margins is probably not as large as many people would have expected.

In that sense, Pedro, regarding that if we do the reverse math, you kept the guidance of 19% to 21% margin this year and you did around 25% in the first quarter, so that would imply 17% to 20% EBIT margin for the remaining quarters of the year which would be only including half of your previous exposure to Venezuela.

So my point is can we assume that you can still do almost 20% EBIT margin even with a much lower exposure to Venezuela? Does this math make sense?

So what I can tell you is what's in our guidance, so we have maintained our operating margin guidance of between 19% and 21% and we have said that the Venezuela -- a capacity reduction, seat reduction which -- it's equivalent to 40% more or less, it will impact us less than 1 percentage point of operating margin, but we still feel that we're going to fall within range. So that's kind of where we are.

For next year, you don't see a big change in the margins as well?

Not really. I mean from what we're saying is that we believe that our 19% to 21% guidance for the year is still accurate a lot.

Okay. Even when we think about the -- like a full year with half the operation in Venezuela?

Right, exactly. We're actually -- the reductions are going to -- see reductions which are coming in, in May, June, and July, so it's not all at the same time are going to basically impact seven months of the year more or less because it did not start in January.

So it's going to be like seven months of the year. So whatever impact it's equivalent to that time period. And I should also add that what we're also doing is reducing the amount of bolivars that we're going to be accumulating in Venezuela to a point where we feel it's going to be totally manageable. And then we only have the old stock to worry about and we'll just lobby that until that's solved.

With that Venezuela is going to be less than 10% of your revenues right, Pedro, with that -- after the capacity reduction, no?

Yes, it should be around less than 10% I would say, yes. That's accurate.

Okay, congratulations.

Thank you.

Duane Pfennigwerth, Evercore.

At the risk of being banished to Caracas here as you joked on the last call, just a couple more; can you talk about the demand environments in Venezuela specifically and any changes that you're seeing now versus kind of the very strong demand in the fourth quarter, because I guess the nature of my question is this; if there really hasn't been a change, these capacity reductions may in fact really boost your ASM and really increase your yields. So is this a response to weaker demand that you're seeing or is this simply a response to not getting paid?

Okay, so it's a response to not getting paid. The demand is as strong as before, so we will manage very strong, but what we're trying to do is instead of flying at capacity where we're not getting paid, deploy that capacity where we do get paid, where we don't have those issues even if it's slightly lower margin markets or routes. So it's about getting paid.

And in terms of RASM, we will not expect the reduction in capacity to have the kind of effect you're referring to in RASM, a positive effect, because at the same time we're trying to stimulate more dollar sales. So we're not playing the game of just a tight capacity, higher RASM, and higher bolivar sales.

So no, I don't -- we don't think there's going to be an impact there, a significant impact.

Okay. And then have there been I assume no or you would have stated it, but have there been any repatriations yet this year?

Duane, this is Jose here. The last thing that we had was in October 2013. There are some airlines that have gotten January 2014 repatriations, but it's not the -- it's just simply I think they're ongoing for partial repatriations going on. And so continue to work with the airline association there to ensure that this is retaken as soon as possible.

Okay, thank you.

Savanthi Syth, Raymond James.

Just if you look at the -- on the non-fuel cost side as you look further out, are there pilot and flight attendant contracts that will be coming up over the next few years?

We have one for one flight attendant this year. Flight attendant will be negotiated this year. A mechanic already -- was already negotiated. That was earlier this year. That was closed already. General workers was the end of last year, that was already negotiated. So we have flight attendants right now and then pilots not until 2016.

Got it. And then just on the capacity cuts in Venezuela, I just want to understand, in May you are down-gauging 5 of the 800s to 700s, and then in June you're down-gauging one of those 800s to a 190. I wonder what you're doing in July?

In July we are reducing a -- well, actually in June we're also reducing frequencies from Colombia to Venezuela. And then in July we're also reducing frequencies from Panama to Venezuela. So July, it's mostly some frequency reductions.

So how many flights a day will you have after all the cuts?

We'll still have a significant service in the -- let me try to add it up.

Yes, I think --

To Caracas we will still 16 flights per week. We have daily to Maracaibo, daily to Valencia. From Bogota -- we will still have more than daily from Bogota and Caracas. So we will keep a good service level to the market.

Understood. And is there anything you can do about the fact that some airlines are getting paid while others aren't or it's just a matter of continuing to negotiate?

I think that it is simply an issue of -- they're just simply came to (inaudible) as they can. There is no real major issue that we've seen that some are and some aren't. It's just simply -- it's just taking them I think time to get that process in place. We have not had any indication that it's anything related to --

And no one has been paid in any significant way, so nothing material.

Okay. And then if I might ask one last question, not sure there is time; we're heading into the seasonally weaker period and you are having currency weakness everywhere. I mean, how do you see yields progressing in the second quarter?

Well, actually from what we're seeing, I mean in most of April and May, we're not really seeing any significant changes in terms of yield versus last year. I mean, we're -- we of course are increasing our capacity year over year and -- but we are basically seeing flattish yield environment.

Perfect. All right. Thank you so much.

Thank you.

Michael Linenberg, Deutsche Bank.

Good morning, this is actually Catherine O'Brien filling in for Mike. With regard to the high-demand markets you are reallocating capacity to from Venezuela, are there any regions you are a lot of traffic to the high demand or you're really seeing strength uniformly throughout your network?

It's strange over here, yes, we're not pinpointing a specific region, but throughout our network we have a market of high demand where we can add frequencies and update aircraft. So yes, I mean, I will not -- it will be hard to just mention one single market. It's in every region we have more than a few markets where we can add capacity and actually we have no problems with redeploying the capacity. We have more choices than aircraft.

That's great. And then just quickly, would you mind giving us an update on your pre-planning strategy? I believe in the past you've mentioned the target of getting to 50% own versus 50% lease. Where do you stand today and where do you see that going forward?

So as of now we stand on basically about two-thirds of our fleet is owned and about a third is leased. And historically as you know we've been bringing out or balancing our percent of leased versus owned. And we don't think that where we are (technical difficulty) -- we're going to be for the next -- for foreseeable future basically in the two-thirds one-third proportion.

Okay. Thank you.

Bernardo Velez, GBM.

I was wondering how much of these $496 million in Venezuela is denominated at the previous rate of around VEF6 per dollars?

Yes, around $488 million is at the VEF6 exchange rate.

Okay, great. And can we say that after July will Copa continue reducing its capacity in Venezuela or can we say that after July that's the capacity we should continue expecting going forward?

Well -- this is Pedro here; we have or we will reduce capacity to a point where we can still serve the market in a proper way with multiple daily frequencies and a good service level, and at the same time reduce the accumulation of bolivars to a minimum amount.

So we feel that like a sweet spot, the perfect balance. However, if even after being at that minimum amount of bolivars we don't get paid, then we will reconsider. But we think we're taking capacity to our sweet point, to our sweet spot.

Okay, perfect. Thank you so much.

Thank you.

Dan McKenzie, Buckingham Research.

Yes, a couple of questions here; I guess, following up on the revenue risk from reduced flying to Venezuela -- thanks for quantifying that. I guess I'm -just trying to reconcile the 20th (inaudible) is a pretty dire picture, but you've obviously come up with a pretty effective strategy to close that hole.

So I'm just wondering if you can help -- we can just kind of peel back the onion, I wondered if you'd be willing, pardon me, to peel back the onion a little bit; is it just that the new flying is that compelling? Is it that the plan to offset the lost revenue can be made up with flying across other parts of your system? Is it that perhaps you found cost saving elsewhere to close that operating margin gap?

It's mostly about redeploying that capacity to our most profitable and higher demand market. So -- and it's less profitable of course than Venezuela because we are guiding to a operating margin reduction of less than 1 percentage point for a seven-month period.

So it has an impact, but it's not a significant impact, maybe not as significant as some thought. And it has to do again with redeploying that capacity to the better markets we have out there. And kind of what I said before is that we have enough of those options of high demand, a good profitability market where to redeploy capacity.

Very good. And then on a different topic, I'm wondering if you can perhaps come back at us once again with the right liquidity that -- what the right liquidity, pardon me, should be for determining surplus liquidity? And I guess what I'm wondering is if the level of liquidity that Copa has historically targeted still makes sense just given the normalization of the global economic environment? And I guess what we're seeing is US airlines lower that bar and I'm wondering if it makes sense to revisit what that bar should be for Copa.

Yes, we're -- as I mentioned previously we are in that process as we speak and if it's either via additional dividends, or a share repurchase program, that's something that is under consideration right now by us. One thing that we have to mention of course is we are very cognizant that this is the airline industry, so we are of course very -- we understand the value of having a strong balance sheet as well in this industry.

Very good. Thanks guys.

(Operator Instructions) Stephen Trent, Citigroup.

(Inaudible) Gaznika stepping in for Stephen Trent. How are you doing this morning?

Hi [Stephen].

I guess, like, most of our questions have been covered, I mean, obviously a lot of questions were about Venezuela. We saw there is a very big year-over-year rise in short term to investments now. Is this related to a more aggressive cash management strategy, maybe if you could go a little bit more into the cash management strategy that you have for Venezuela minimizing its impact on your balance sheet?

Yes. So first quarter what we have, it's indeed we are as I mentioned earlier we do stress-test our balance sheet and part of our investment strategy is related to the fact that we have aircrafts coming and so it's all related to our continuing business.

So in all honesty we continue taking care of our balance sheet in a way that we try to provide value to our shareholders and at the same time keeping -- taking care of the growing business, so.

Okay. I guess, maybe -- I don't know if you mentioned it before, maybe I missed it in the release, but what I guess is the major portions of those investment rises?

Excuse me, can you say that again, Steven?

I'm sorry, what was -- I guess what comprises the majority of those short-term investments of the rise year over year?

Okay, yes. A part of the Venezuela cash accounting treatment of -- part of the Venezuela cash is treated as short-term investments to simply -- and so therefore part of that cash is in that line as well. So that's essentially what that is.

Excellent. Okay, thank you.

Thank you.

Pedro Balcao, Santander.

This is Pedro Balcao from Santander. Again congratulations on the results. Two questions; first one, you said that the impact on the margin this year of cutting capacity in Venezuela by around 40% will be circa 1%.

My question, is it fair therefore to expect another not 1%, but close to 1% impact also next year when we will have the full year impact of this cutting capacity?

My second question is regarding the cash position in Venezuela. I really wanted to understand better if it's correct to explain the fact that you effectively -- I mean, the fact that the cash position in Venezuela did not increase this quarter because effectively you didn't generate any cash flow in Panama this quarter due to the change in the ticket sales policy that effectively implies a strong investment in working capital? Thank you.

Okay. I'll address the first question. Okay. Sorry, I was trying to -- okay, so your first question; what we're seeing is that for let's say a seven month period this year, 2013, where we would have cut seats, cut capacity, the impact will be less than 1 percentage point in operating margin.

So next year we will have -- if the capacity is not put back, so if the status quo continues in Venezuela, and we don't know that yet, but if we were to assume that then those capacity cuts will remain for 12 months instead of seven.

So an impact of less than 1 percentage point could be slightly more than 1 percentage point for the whole year for the 12-month period. However, there are other things that we can do in market where that capacity has been redeployed we will probably grow, we will probably do better, and there will be other actions we can take to mitigate the impact on the operating margins. But if you do a straight-line analysis, then yes, you could extrapolate from 7 months to 12 and calculate what that impact would be.

And in terms of the cash accumulation during the first quarter, what occurred is that there were -- some of the sales that were performed last year corresponded to the first quarter this year. In addition, we were -- placed restrictions in our sales in Venezuela that allow us to reduce the accumulation of bolivars and we also checked some of the sales to -- (technical difficulty). So that's I think the reason why we have not accumulated as much during the first quarter of the year.

Sorry, just a follow-up; but you did invest some money on the working capital in Venezuela and that's at least part of the reason why you did not accumulate cash this quarter, right?

No, no, no, the reality is that there is -- it's just -- basically the cash total is the same. The only thing is that in the balance sheet part of it's shown as investments, just simply because of accounting like, but the entire funds are sitting in our bank accounts in Venezuela.

Well, thank you.

Hunter Keay, Wolfe Research.

Two quick follow-ups; Jose, how should we think about -- you said some of the sales -- the cash flow was from sales from 2013. How should we think about the tempo which this burns off, like, I mean, how much -- what's the average booking curve in Venezuela and how should we think about that burning off throughout the course of the year as capacity comes down?

Yes, so I would say that approximately about a third, or slightly less than a third of our 2014 first-quarter sales were performed during the latter part of last year. So that's kind of how it was --

That is helpful, yes, I got you. Okay. And then Pedro, a little more on the political situation; I mean, we saw president (inaudible) talk about investing in Panama's infrastructure, which is obviously good and consistent with Martinelli's policy, but he's also talked about price controls and staple items which I don't think is very good.

So we know President Martinelli has been very supportive of Copa over the years. Can you give us a sense of any kind of policy changes that you might be thinking about with regard to price controls on the airline industry and more importantly some of the expansion that you alluded to in your prepared remarks talking about the jet purchase, you have 10 more that could happen beyond this current expansion of 20, do you expect the current administration or the incoming administration to be just as committed to that type of infrastructure investment?

Correct, I expect the current administration to be as supportive, if not more supportive. So we have zero worries. They're just as committed.

And the current -- the elected president was the vice president of the country and he was part of some of the major decisions that were made under Martinelli's government. So we're not expecting any changes, we're not expecting any price controls, we're not expecting -- I mean the business environment will be just as healthy and the infrastructure projects will continue.

We all suspect that the next phase of expansion for the airport will probably be approved before the south terminal is completed and that will be our expectation. So before 2016 when we expect that to be inaugurated, we feel that the next phase will already have been awarded. So that's not a reality right now, but we think that's what's going to happen. So no, we see a bright future for Panama and for our business right now.

Great, thank you both.

Thank you.

Thanks.

Stephen Trent, Citigroup.

Sorry guys, (inaudible) again. I've got one quick follow-up. Now, in the first -- and I'm looking (inaudible), Copa was actually the only airline not to reduce capacity to Venezuela directly, so as a result, how do the carriers international market change and what I guess could you give any feeling of what Conviasa has been doing over the same?

Exactly what's the question, Stephen, like, what has Conviasa been doing in terms of capacity?

Yes, we were just wondering what -- I guess maybe get a feeling what Conviasa is doing and also how did I guess your international market share change over the quarter given that your (inaudible) capacity is (inaudible) as other airlines?

Right, we -- well, we don't see them doing anything really, I mean, not in our markets. No changes from the quarter before. So we haven't seen any changes there.

I mean, we will reduce capacity. That might have an effect in market share. It's really not something that we worry about. It's, like, not the issue right now. What we're doing is kind of solving the Venezuela issue because we're taking the accumulation of bolivar to a point where it should not be an issue.

We are maintaining our high margins. And then we won't -- I mean we'll worry about the accumulated cash of course, it's significant. But going forward, Venezuela should be under control and should not be a big concern like it has been recently.

Okay. Thank you very much.

Thank you.

Thanks.

Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to management for any closing comment.

Okay. Thank you. Thank you all. This concludes our first-quarter earnings call. Thank you for being with us and thank you for your continued support.

I would like to also remind you that we are holding an investor luncheon in New York on Friday May 30th. So if you would like to join us, please register in our Investor Relations website in copa.com or contact Rafael Arias. So we hope to see you there. Have a great day.

Thank you ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.