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Operator
Ladies and gentlemen, thank you for standing by. Welcome to the Copa Holdings second quarter earnings call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions).
As a reminder, this call is being webcast and recorded on August 7, 2014.
Now, I will turn the conference call over to Rafael Arias, Director of Investor Relations. Sir, you may begin.
Rafael Arias - Director of IR
Thank you very much, Latoya, and welcome everyone to our second 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 second 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' 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 the non-IFRS to IFRS financial measures can be found in our second 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.
Pedro Heilbron - CEO
Thank you, Rafael. Good morning to all and thank you for joining us for our second quarter earnings call. First, I would like to congratulate all of our coworkers for another excellent quarter. Thanks to their efforts, we have accomplished great financial and operational results for the first half of the year, while continuously delivering the world-class product that our passengers enjoy and expect from us.
Among our main highlights for the quarter, consolidated revenues grew 14% on 10% capacity growth. Passenger traffic grew 13%, resulting in a 2 percentage point year-over-year increase in load factors. Our higher load factors along with an increasing yield resulted in an increase in unit revenues of almost 4%.
On the cost front, we were able to maintain our unit cost or CASM at $0.107 despite 1.5% higher jet fuel prices. As a result, we delivered a 19.5% operating margin.
On top of this strong financial result, we continued delivering a world-class product, with on-time performance for the quarter coming in very close to 90%, again among the best in the industry.
During the first half of the year, demand was able to assimilate a capacity growth of almost 10% year-over-year as traffic expanded by almost 12%, with yields up 1%.
Nevertheless, one must keep in mind that the first half results included higher yield Venezuela generated revenues, which will be reduced substantially in the second half, mainly from an estimated 50% Venezuela capacity reduction which started gradually in May.
This reduction is higher than what we originally reported last quarter since we recently implemented additional capacity cuts, which began on August 1st.
With regards to our exposure in Venezuelan bolivars, during the month of June we received payment of $43 million corresponding to our January and February 2013 repatriation request, which were honored at the VEF6.30 exchange rate. So the exposure we disclosed in our release represents the currency we have accumulated from March 2013 to June 2014.
Going forward, we do not expect to accumulate significant balances in bolivars. That said, Copa as well as other airlines, together with Aereas, continues its discussions with the Venezuelan government so that pending repatriations are expedited and honored at the exchange rate at which tickets were sold.
Moving to our expansion plans for 2014, year-to-date we have received five new Boeings 737-800s and are expecting three more during the remainder of the year to close 2014 with a consolidated fleet of 98 aircraft.
In June and July, we executed the first phase of our growth plan for 2014, which included three new destinations, Montreal and Canada, Fort Lauderdale in the US and Georgetown in Guyana, all of which are performing as expected. In addition, we have also increased frequencies to several markets to bolster our network and enhance our connectivity.
For the end of the year, we will initiate service to Campinas, our eighth destination in Brazil, and add several frequencies to the rest of the network. So by year end, Copa Airlines will provide service to 69 cities in North, Central, South America and the Caribbean, strengthening its position as the most complete and convenient connecting hub for intra-Latin America travel.
With regards to our fleet plan, we recently agreed to bring in three additional leased aircrafts for 2015, all new Boeing 737-800s. As a result, we now plan to receive 11 new Boeing 737-800s in 2015 while returning five aircraft, two 737-700s and three Embraer 190s, for a net growth of six aircraft and a capacity growth in ASMs similar to 2014.
With regards to infrastructure, the Tocumen Airport south terminal expansion, which will add another 20 jet bridges to our connecting center in the second half of 2016, continues to advance without any major delays. This project will keep the Tocumen Airport at the forefront of airport capacity in our region and will ensure that our hub has the necessary infrastructure to accommodate our future needs.
Additionally, we are currently expanding our training center to accommodate a fourth flight simulators, which we plan to receive in the first half of 2015. Our training center expansion is an important part of our commitment to maintain world-class standards for pilot training and safety.
Moving on to the demand and yield environment, the IMF recently reduced their Latin America economic growth estimates to between 2% and 2.2%, a half percentage point reduction. Panama is still expected to lead the region with GDP growth in the range of 6% to 7%. Furthermore, passenger traffic growth in our region has been and should continue to be healthy.
However, we expect the second half of the year to be affected by lower yields and ultimately lower unit revenues. The main driver for this is the additional capacity reductions in Venezuela, as well as a greater shift in sales from bolivars to lower yielding non-bolivar fares.
In addition, we have seen some yield weakness from Argentina and July numbers were below expectations due mostly to the effect of the World Cup on traffic flows.
Going forward, we expect healthy demand and we will continue taking the necessary actions to mitigate the Venezuela currency risks, while maximizing Company revenues.
So to summarize, we are very pleased by our second quarter results. Our team continues to deliver world-class operational performance. We are further strengthening and consolidating our network. We continue to mitigate the Venezuelan currency risk by further reducing capacity to the market and increasing non-bolivar sales. Our yield environment for the second half showed signs of weakness, mainly due to Venezuela, and we anticipate unit revenues will be lower year-over-year and lower compared to the first half.
Nevertheless, we are taking the necessary commercial actions and are confident about the long-term prospects of our business model and our ability to continue delivering industry leading financial results.
Thank you. Now, Jose will go over our second quarter results.
Jose Montero - CFO
Thanks, Pedro, and good morning everyone. Thanks again for joining us. First, let me begin once again by thanking all of our coworkers for their efforts in running a world-class operation and delivering a very solid quarter, one in which we grew capacity by 10%, increased revenues by 14% and maintained very competitive unit costs, which led to an operating margin of 19.5% for the quarter.
Looking at our financial results, reported net earnings for the quarter came in at $118.2 million, earnings per share of $2.66, compared to last year's net income of $74.4 million, or earnings per share of $1.68.
Excluding a fuel hedge mark-to-market gain of $4.1 million and a $1.9 million loss on Venezuelan currency devaluation, underlying net income for the quarter came in at $116 million compared to last year's second quarter underlying net income of $85 million, which excludes a fuel hedge mark-to-market loss of $10.6 million during that period.
With respect to traffic, revenue passenger miles increased 13% year-over-year bringing our load factor for the quarter to 77%, a 2 percentage point increase compared to last year's second quarter load factor. Furthermore, passenger yields increased 1.6%, which altogether contributed to a 3.7% improvement in unit revenues for the quarter.
Operating revenues for the quarter came in at $674 million for a 14% year-over-year increase on 10% capacity growth.
On the expense side, second quarter operating expenses increased 9.7% year-over-year, in line with capacity growth. Hence, costs per available seat mile were unchanged when compared to the second quarter of 2013.
We also saw an improvement of nearly 1% year-over-year in CASM ex-fuel, which came in at $0.066 for the quarter, partly due to the timing of the expenses, some of which should come in later in the year.
Moving on to operating earnings, consolidated operating earnings for the quarter came in at $131.2 million, growing 34% year-over-year and translating into an operating margin of 19.5%.
As to non-operating income and expense, second quarter results reflected a net non-operating income of $0.8 million, consisting mainly of a net interest expense of $3.3 million and a $4.1 million gain in the other net line, mostly related to the mark-to-market of fuel hedge contracts.
With respect to fuel hedges, we ended the second quarter with hedges for 23% of the projected volume for the second half of the year using crude oil and jet fuel swaps. 15% of our volume is hedged in crude oil at an average price of $89 a barrel and 8% in jet fuel at an average of $2.78 per gallon. In addition, for 2015, we have coverage for approximately 15% at similar prices and using the same measurements.
Turning now to our balance sheet, we continue to strengthen our Company's position as cash and cash equivalents at the end of the quarter totaled $1.15 billion, which represents 42% of last 12 months' revenues. Excluding cash in Venezuela, cash and cash equivalents represent a healthy 23% of last 12 months' revenues.
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 debt, approximately half of which is fixed rate debt, with a blended rate including fixed and floating rate debt coming in at just under 2.5%.
In regards to Venezuela, we ended the quarter with a total of $528 million in bolivar exposure. During the month of June, we received payment from the Venezuelan government for $43 million at a VEF6.3 per dollar exchange rate. Furthermore, with the capacity reductions we have performed, we expect to reduce our accumulation of bolivars to a minimum going forward.
Turning now to dividends, it is important to mention that we continue to return value to our shareholders. On September 15th, we will pay our quarterly dividend of $0.96 per share to stockholders of record as of August 29th.
In terms of fleet, during the quarter we received the second and third of our eight scheduled aircraft deliveries for the year -- all Boeing 737-800s. So we ended the quarter with a fleet of 93 aircraft; 49 737-800s, 18 737-700s, and 26 Embraer-190s. Of the two deliveries within the quarter, one was an operational lease and the other one was financed.
Since the close of the second quarter, we have already received two additional aircraft for a current fleet of 95 aircraft. For the remainder of the year, we have three more scheduled deliveries; one financed in the third quarter and two operational leases in the fourth quarter. So we expect to end the year with a fleet of 98 aircraft with an average age of approximately 6 years.
So to summarize, we had another quarter of strong capacity and revenue growth. Costs remained under control and in line with expectations. Our financial position remains very solid and we've had strong first half of the year with very strong earnings.
In terms of our guidance for 2014, despite the solid first half we expect a softer second half of the year, and therefore, we are updating our guidance as follows. We are maintaining our capacity growth in terms of ASMs at plus or minus 10%. Load factor is still expected to come in at plus or minus 27%.
We are lowering our RASM guidance to plus or minus $0.134. We are maintaining our CASM ex-fuel guidance at plus or minus $0.068. We are maintaining our fuel price assumption for the year at an effective price per gallon, including into-plane and net of hedges of approximately $3.15.
And as a result, we are reducing our full year operating margin guidance to a range of 18% to 20%. This reduction in our guidance is mainly driven by softening of yields in the second half of the year, primarily due to the impact of further capacity reductions in Venezuela, as well as our transition to non-bolivar sales.
On the positive side, these measures will also significantly reduce our accumulation of bolivars during the second half of the year and will allow us to focus on the business going forward.
Thank you. And with that, I'll turn it over to Pedro for his closing remarks.
Pedro Heilbron - CEO
Thank you, Jose. And now we'll open up the call for some questions.
Operator
(Operator Instructions).
Michael Linenberg, Deutsche Bank.
Michael Linenberg - Analyst
I want to just touch on the Venezuelan situation. When I look at what your cash was in Venezuela at the end of the quarter, the amount that was trapped, that was up about $40 million or so, and during the quarter you also got basically $40 million back. So if it's up $40 million on a net basis, it looks like it was a pretty significant accumulation this quarter.
For some reason I thought that you were actually going to stop or really slow down your sales in bolivars during the June quarter or is that more of a third quarter phenomenon?
And then also the cash build, the gross amount, not the net amount, that did seem extreme. Was there a run on the bank? Were people trying to buy tickets? I mean what drove that -- unless it was just maybe seasonal?
Pedro Heilbron - CEO
Yes. Good morning, Mike. So, yes, the accumulation -- reducing accumulation is more of a Q3 thing. But I should say that we had our bolivar sales very tight at the beginning of the year and the beginning of the second quarter. So we open our -- and again, the capacity cuts we are going to start gradually in May, mostly in June and July.
So we had to open up bolivar sales to sell some of that inventory we still had and the sales just shot up more than what we expected. So we sold more than what we were expecting at the moment. That contributed to a much stronger Q2 than what we were at first forecasting.
I should say that since we have further cut Venezuela capacity and that's part of the reason why we implemented the additional 10% cut, which took us from 40% to 50% of capacity being taken out. We have also stimulated more non-bolivar sales. So from now on our expectations are that the accumulation of bolivars will be minimal, if any.
Michael Linenberg - Analyst
Okay. And then to Jose's point that there would be -- I think he said that a significant reduction in the accumulation of bolivars by year end. By year end, should the number actually be less? I mean will it be below $500 million, for example? Or will it still be higher; it just won't grow as fast as of a clip? How should we think about that?
Jose Montero - CFO
I think in general terms, Mike, you should expect it to remain constant. Of course if the government were to pay us, then it would go down.
Michael Linenberg - Analyst
Okay. My last question is the 50% cut is significant, but then when we compare to what everybody else is doing, it's actually less. I mean you have other airlines that are either pulling out of the market completely or cutting anywhere from 70% to 90%.
As a result, is your relative share in Venezuela today -- because you are certainly one of the biggest international carriers to and from Venezuela, is your relative share actually larger today than what it was six months ago or even after the 50% cuts?
Pedro Heilbron - CEO
It might be -- this is Pedro. It might be larger. But we are also serving different markets. So we are all in our own different markets, so it doesn't really make a big difference from that standpoint. But it could be larger.
The key thing for us is that we've been taking our capacity to bolivar neutral, and that's a combination of the capacity we are offering and the sales that we can stimulate in non-bolivar currency -- or to put it in another way, outside Venezuela.
So those are the two things we are balancing and we feel that we have balanced that -- we have finally balanced that. We were not there in the second quarter. That's why we sold so much. But right now as we speak, we are not accumulating bolivar. We are still selling to a point, but not accumulating.
Michael Linenberg - Analyst
Okay, very good. Thank you.
Jose Montero - CFO
Thanks.
Operator
Savanthi Syth, Raymond James.
Savanthi Syth - Analyst
On the yield deterioration that you saw on the World Cup side, did you not see softness in June? And also now that the World Cup is done, are you seeing a recovery there?
Jose Montero - CFO
Hi, Savanthi. It's Jose here. The World Cup affected our regular traffic patterns in July in Brazil and to some degree in other markets, and so we believe that it will impact Q3. But we expect in the case of Brazil to perform well throughout the rest of the year. And as a matter of fact, we are adding Campinas at the end of the year, so we believe that Brazil actually for the rest of the year should be performing relatively well.
Pedro Heilbron - CEO
And this is Pedro. Just to add a little bit to that is -- well, in June we had a lot of people going to Brazil for the World Cup. That traffic returned in the first half of July. That basically blocked the regular July high season Brazilian traffic from leaving Brazil and then returning in the second half. So we had a weaker second half.
Plus, less people travelled than regular outside of Brazil -- Brazilians, less Brazilians travelled outside of Brazil because they had the World Cup going on. Their money went to the World Cup. And other countries in South America travelled to Brazil or drove to Brazil instead of going to some of our leisure destinations. So the traffic flows were kind of messed up versus what we are used to in a usually strong July, and for revenue management that was also a big challenge dealing with something that was hard to predict.
Savanthi Syth - Analyst
Just if I address it as a follow-on that is your thinking that maybe as you go into the fourth quarter that yield will start to firm up?
Pedro Heilbron - CEO
Yes, so sale should -- yes, those markets should be back to normal in the fourth quarter. And Jose mentioned we are adding Campinas, our eighth Brazilian destination, at the end of the year in December.
Savanthi Syth - Analyst
Got it. And then just on Venezuela, like I know last year 10% of the sales were in US dollar and maybe as you narrowed the booking window and maybe that went to closer to 20%. Where is it right now as kind of a percentage of sales and where do you expect that to go?
Pedro Heilbron - CEO
So we have reduced capacity, as mentioned before, and we have stimulated non-bolivar sales, which could be in any other currency, which is automatically transferred to dollars. And right now it's probably slightly above 50%. And it has taken us to a point where we are no longer accumulating bolivars.
We can cover our local expenses with our bolivar revenues and then the difference is being sold outside of Venezuela. Load factors are still strong and remain strong. So we think we have reached the right balance. But Venezuela it's a dynamic situation, so it has to be monitored daily. And if it changes, we will make the necessary adjustments either way.
Savanthi Syth - Analyst
Understood. All right, thank you.
Pedro Heilbron - CEO
Thanks.
Operator
Hunter Keay, Wolfe Research.
Hunter Keay - Analyst
When you guys affirmed the margin guide three months ago, and the 19% to 21%, I think the broad opinion was that that the low end was probably more likely than the high end given the commentary about Venezuela having a 1.8% impact. But now you are saying obviously 18% to 20%. So what was the primary driver of that change from three months ago even when you knew you were cutting? Is it the incremental cuts to Venezuela above and beyond what you were cutting three months ago being replaced with lower margin flying or is it more the weakness elsewhere in the network that drove that downward revision?
Jose Montero - CFO
Hi, Hunter. It's Jose here. And so -- yes, you know -- well, the main reason is the additional cuts that we performed in Venezuela and much higher proportion of sales outside of Venezuela than what we originally estimated. But I also have to say there's some yield weakness in some other markets such as Argentina that we are seeing that are contributing a little bit to this.
Hunter Keay - Analyst
Okay. So maybe a roughly even mix between the two then, Jose?
Jose Montero - CFO
I would say it's mostly Venezuela.
Hunter Keay - Analyst
Mostly -- okay, thank you. And is there a CASM benefit from cutting? I mean presumably I would -- correct me if I'm wrong, but I believe that's a high cost country to do business in -- is there a CASM benefit that as you are pulling capacity out we might see a bit of a lagged benefit on the cost side to give us reason to be optimistic about say, a CASM benefit, as we move into 2015 on lower Venezuela flying? Is it fair to think about it that way?
Jose Montero - CFO
Yes. Well, let me talk first about our CASM. Even though we are maintaining our CASM at $0.068 for the rest of the year, there could be some upside there and especially going up towards 2015. So that certainly could be the case.
Pedro Heilbron - CEO
And this is Pedro. I would add that Venezuela has lower distribution cost, so there's some upside there. And I would like to add also that as we've shifted capacity away from Venezuela, some on relatively short notice, we have to wait for that capacity to spool up, which is something that would happen in 2015 -- and also for revenue management to adjust to different demand patterns from what we were used to.
Venezuela bolivar sales were, as we all know, high yield and that kind of dominated the preference of our revenue management system. So as we bring that down, we need to adjust the way we manage our systems.
Hunter Keay - Analyst
Okay, thank you.
Operator
Duane Pfennigwerth, Evercore.
Duane Pfennigwerth - Analyst
As we think about your guidance and the decline in unit revenue in the second half that it implies, can you give us any help on the progression by quarter? It looks like you imply about down 7%. Maybe there is some conservatism there. Do you expect a materially larger decline in the fourth quarter because it feels 4Q last year was well above seasonal trend?
Jose Montero - CFO
Duane, how are you? It's Jose here. We have to start by saying that the first half also had better performance than we expected, mostly due to the stronger year-over-year Venezuela performance, and also due to some timing of expenses that we had during the first half.
Having said that, the lower guidance for the second half of the year is mostly driven by Venezuela and also due to some events that occurred during the -- mostly third quarter, specifically, as Pedro mentioned earlier, the World Cup and some -- Argentina, the performance of Argentina. And again during the second half of the year, there is some timing of expenses that should come in with the potential upside for having some benefits in terms of our cost performance during the latter part of the year. So I think that's the way kind of we see it right now.
Pedro Heilbron - CEO
And this is Pedro, Duane. And in terms of how that's going to play out in the next few quarters, we have more upside in -- we look at the kind of evens the next two quarters. But there is more upside in the fourth quarter, because obviously there's still more time to take revenue management actions for some markets to spool up, etc., so we would expect to see a gradual improvement in the fourth quarter.
Jose Montero - CFO
And you mentioned something about 2015 and I think that as -- as Pedro mentions here -- these markets mature and our revenue management team adjusts the shift of capacity that we perform to other markets, we expect a lower impact on margins in 2015. However, it's still too early to tell in terms of what occurs then.
Duane Pfennigwerth - Analyst
Okay. I guess could you just maybe playback some history for us for the fourth quarter of last year. You crushed that number, if I recall, and I do remember you saying something about kind of a surge in demand in Venezuela specifically. Was there something on the ground, some incentive that changed or that people feared would change that caused a surge in bookings in Venezuela in the fourth quarter of 2013?
Pedro Heilbron - CEO
Yes, in the fourth quarter, yes, bookings were just -- that's kind of when bookings started shooting up in Venezuela. And it had to do with the currency, an arbitrage between the official rate and the black market rate and expected further devaluations. Plus, it's a strong travel quarter for them. So people bought six months into the future for all those reasons and probably some other reasons.
And we have that under control. We are not accumulating. So that Venezuela upside won't be there. We have also lowered capacity by 50% and selling a lot more in non-bolivar denominated currencies. So kind of the Venezuela factor which was a big boost to -- actually to the last three quarters will not be there in the second half of the year.
Duane Pfennigwerth - Analyst
Okay, guys, thank you.
Jose Montero - CFO
Thank you.
Operator
Bernardo Velez, GBM.
Bernardo Velez - Analyst
I'm curious regarding the performance in Venezuela after the capacity cuts -- or if you could share with us some of the performance in Copa in terms of yields and demand during June and July?
Pedro Heilbron - CEO
Well, this is Pedro and maybe Jose wants to add something. But Venezuela -- Venezuela remains strong in the sense that load factors are high and yields are healthy. But obviously we are not getting paid. So that's why most airlines have reduced capacity in a significant way so that there's a balance and we don't continue accumulating bolivars.
But it's not a problem with demand. Demand is -- we could triple capacity, open up sales and [trade] it all. But then there is the problem with getting paid. So we've taken our capacity and our bolivar denominated sales to a point where we expect not to accumulate that significant balance for the rest of the year. But again, it's not a problem with demand. Demand is very strong. It remains strong.
Jose Montero - CFO
However, Bernardo, talking about our revenues and proportion of revenues that Venezuela has, Venezuela used to be before the reductions in terms of revenues about in the low teens in terms of percent of our revenues. And that with the capacity reductions that we performed, it's probably going to end up for the second half of the year to be in the mid single digits.
Bernardo Velez - Analyst
Okay, perfect. And I would like to understand what was the main constraint in the negotiations with the Venezuelan government; meaning, why didn't you reach an agreement to repatriate the remaining $446 million at the VEF6.3 rate?
Pedro Heilbron - CEO
Right. But those negotiations continue, those talks continue. And as far as I know, most airlines have not reached an agreement and I'm not sure the ones that have reached an agreement, those agreements have been honored and they have gotten paid. I'm not sure. So I think that's some -- that's an ongoing process that is really not totally up to us.
Bernardo Velez - Analyst
Okay, fair enough. And lastly, could you comment about your sales and cash exposure in Argentina and how are you looking at that market?
Jose Montero - CFO
Well, you know what, we are monitoring the situation in Argentina very closely so as to not accumulate any large balances in pesos. And so far we have had no issues in repatriating our funds out of there. The one thing that I would say is that, as we mentioned previously, yields are down in the market and are down approximately 10% year-over-year.
Bernardo Velez - Analyst
Okay, perfect. Thanks so much for your help, guys.
Operator
(Operator Instructions).
Eduardo Couto, Morgan Stanley.
Eduardo Couto - Analyst
I still have a question on the guidance. When we look especially the low end of the guidance, now at the 18%, given that you did 22% in the first half, it implies 14% for the second half of the year. So my question is, if we think about Copa now without cash accumulation in Venezuela, which is what you guys said that this capacity reduction could mean, should we think about a Company with this -- like 14%-15% margin or you think the Company can do better than that?
Jose Montero - CFO
Well, I think that first of all to talk about what the second half of the year RASM is or margin guidance is, we feel that's what is realistic from where we stand right now for the second half. And going back -- the first main reason why that is occurring specifically in this period of time is because of the reductions or the additional reductions we made in Venezuela.
However, we believe that going forward there is a good upside especially as our revenue management team adjusts to the capacity shift and we believe that 2015 should have -- even though it's too early to talk about 2015, we believe that 2015 should have a better performance than what we are seeing in the second half of the year.
Pedro Heilbron - CEO
And I would add to that is that we are giving you a range. We are not expecting -- when we give you a range, it's because we expect to be in the middle of the range. We don't expect to be in the lower part. And we also always -- if we give you a range, it's because we feel there's upside to the middle of the range.
So I would not assume that the second half is the 14% you mentioned. I think that will be like our worst case scenario. And as Jose mentioned, there's upside. We talked before about expenses and then as revenue management made their adjustments, some markets pull-up. So we are quite more optimistic than that.
Eduardo Couto - Analyst
Okay. So the idea is kind of work with the middle of the range, right, Pedro?
Pedro Heilbron - CEO
Yes. That's why we give you a range, correct. But again there's a range. I mean you can decide that yourself. But when we give you a range, that's what we are expecting. But obviously there's a range for a reason.
Eduardo Couto - Analyst
Okay. Thank you, guys.
Jose Montero - CFO
Thanks, Eduardo.
Operator
Bob McAdoo, Imperial Capital.
Bob McAdoo - Analyst
I got two -- at the risk of beating the Venezuelan thing to death here, when I listened -- when I talk to the people at American, one of the things that they talk about is that there was this program which allowed people to buy $3,000 in dollars for a different exchange rate than what was out on the street. And in effect somebody could go make a round trip to Miami or a round trip I guess potentially to Panama and walk away with $3,000 in actual dollars and the only cost was really the cost of the round trip ticket.
And what they said was that that caused -- those flights just because somebody can use that to go basically make money just flying back and forth, that meant that those flights were virtually always full. And because they were virtually always full, the revenue management system tended to drive the ticket price up, but the people didn't mind paying a higher ticket price because they were doing it just to get the dollars.
And I wonder, did you see that same kind of thing? And if that's the case -- when you say that demand is weakening or whatever, yields are weakening, it's not necessarily that yields are weakening, it's just that the old numbers were inflated because of this funny situation and now you don't have that.
It's not that there isn't demand through the rest of your system. It's really the fact that this layer of funny high priced travel is not taking place anymore and that makes the overall number look like it's down -- because it is down on an overall basis because that layer isn't there. But the rest of your business -- demand is not soft and it's not -- and the revenues are not weak or the yields are not weak. It's just the fact that that one layer is not there. Is that the -- are you seeing that same thing that American saw?
Pedro Heilbron - CEO
Well, Bob, you are partially correct. And the only difference in what I would say is that that demand is still there. Only that we were not getting paid. We were selling those high yield bolivar fares that you had just mentioned and the only reason we have reduced that is because we were not getting authorized to repatriate the dollars.
But the demand is still there. I mean if we open up the [vaults] tomorrow, that demand will be there. In as -- maybe not exactly the same person, the same passenger, but there's still plenty of that high yield demand. But since we weren't getting paid, we have reduced capacity; we have stimulated more sales outside of Venezuela, non-bolivar sales. And we have kind of pushed that, the demand you are describing, to the side.
So you are right in what you are saying. The only difference is that the demand still exists. We just are not so interested in it.
Bob McAdoo - Analyst
Yes -- no, I guess -- I totally understand what you are saying there. I guess my point was, it seems like when those of us on the outside are looking at a total RASM that is down versus what we maybe saw last year or whatever, the total RASM is down because there is that chunk of high yield traffic that is just not a part of the system anymore and rightly shouldn't be a part of the system.
But the rest of the system, the other 60 some cities that you fly to, the demand is what it was, the yields are what they were and those are not down. Is that correct?
Pedro Heilbron - CEO
So you are correct. Yes, you are mostly correct.
Bob McAdoo - Analyst
Okay, that's what I want. Thank you.
Pedro Heilbron - CEO
Yes. Okay.
Jose Montero - CFO
Thanks.
Operator
Stephen Trent, Citi.
Kevin Kaznica - Analyst
This is Kevin Kaznica filling in for Stephen Trent. Obviously, we have questions about Venezuela. Most of them have been answered. But I just had a quick question. I was talking to a competitor and they basically said that they wouldn't accept any sales in bolivars. I was wondering how much control do you have over that or is that you choose -- is that like part of your management system to choose -- to accept like partial sales in bolivars that you're cash balance neutral?
Pedro Heilbron - CEO
So we are flying to Venezuela and we feel that we need to service the local market also. And we have local expenses of course. So it's not like we have no use for bolivars. So we try to find a balance where we can serve the local market and also cover our local expenses, continue providing a frequent and reliable service to Venezuela.
So we think we've found the right balance where we can provide -- I think we are the international carrier right now with the most daily flights to Venezuela and we are providing a service. We are selling locally enough to cover our expenses. The difference we are selling outside of Venezuela. And we think that's the right balance in our case at least.
Kevin Kaznica - Analyst
Okay, okay, very helpful. Also -- this is not related to Venezuela -- we noticed that VivaColombia started daily nonstop flights from Bogota to Panama City's second airport I think starting August. Have you noticed any differences in advanced bookings and do you guys ever use the second airport? And I think you had some landing rights there?
Pedro Heilbron - CEO
Yes. We only use the second airport as an alternate. We don't have scheduled flights there. And we haven't really noticed an impact in our bookings. I think we are kind of serving different market niches. They go after a different market and we rely a lot in connections. So most of our traffic out of Columbia connects beyond Panama.
So it's a small percentage of our revenue, also when you take out the business traffic. So it's a small percent of our revenue that's -- you would say -- up for grabs or that Viva competes against. So we think we both have our niches. Maybe we'll have more promotional fares even there. And that would be about it.
Kevin Kaznica - Analyst
Okay, very helpful. And then kind of like just going back to Venezuela one more time, what would stop Venezuelan government from forcing their airlines to book tickets using SICAD 2? And if people are already buying dollars at SICAD 1 and then selling their dollars in the black market, forcing people to buy using SICAD 2 might I guess stem the Venezuelan outflow of dollars. Like could that cause a shortage and then nobody gets paid?
Pedro Heilbron - CEO
Honestly, I wish they went to SICAD 2. It would make it a lot easier for them to pay the airlines -- I mean, from here on. Obviously, not the old stuff. But it would probably create an easier flow of dollars if it was SICAD 2.
So SICAD 2 will have no impact on us. We would welcome that actually. But what stops them? I can't say -- I cannot say. But it will create ticket price inflation in local currency. But what's the difference if airlines are cutting back.
Jose Montero - CFO
And by the way, there is really no official word on whether the government will actually move airlines to SICAD 2. And so we are really not clear if this will occur.
Kevin Kaznica - Analyst
Okay, okay, very helpful. Thank you, guys.
Operator
Pedro Balcao, Santander.
Pedro Balcao - Analyst
At the first quarter results, I think you clearly indicated that the reduction in capacity in Venezuela should have less than 100 basis points impact on the full year margin and I guess another 100 basis points next year.
My question is, to what extent has this estimate changed? Is the number now 200-300 basis points for this year and nothing for next year, and why? What is behind this change in estimate?
Jose Montero - CFO
Well -- Pedro, it's Jose here. Since the last earnings call we reduced our capacity in Venezuela further by an addition of about 10 percentage points. So the other thing that occurred is that we also stimulated more non-bolivar sales than what we previously expected.
And so if I was to estimate the impact on the second half of the year, I would say that it will be about 3 percentage points in operating margin due to these additional changes that we made in Venezuela.
Now, on the positive side, this will also reduce our accumulation of bolivars to a minimum. So --
Pedro Balcao - Analyst
Okay, thank you. And what about next year?
Jose Montero - CFO
Well, you know what, 2015 is a little too early to tell. But we believe that the impact in 2015 will be mitigated by the fact that as time passes our revenue management team is making adjustments to a shift of capacity. So I really do expect that we'll have a better margin in 2015.
Pedro Heilbron - CEO
But there will be an impact and it will be higher than what we mentioned in the previous earnings call, as Jose mentioned. So we are working to mitigate that impact. But there will be an impact greater than what we mentioned for the reasons that Jose just mentioned.
Pedro Balcao - Analyst
Okay, thank you. Very clear.
Operator
Helane Becker, Cowen and Company.
Helane Becker - Analyst
Just a question on Argentina, do we have to be concerned about not getting paid in Argentina and that the problems that exist in Venezuela will spread to that country as well?
Pedro Heilbron - CEO
Right now, no. Right now we don't see -- we do not see that risk. We are not accumulating Argentinean pesos, because we are totally on top of -- you learn from experience. And so we are totally on top of that and we've -- I won't detail every action, but we have actions in place that are similar to the actions that we took in Venezuela after so much was accumulated.
So that's not a risk right now. But the world changes. But we will take actions a lot quicker. So we think that's under control.
Helane Becker - Analyst
Okay. So you are getting paid by Argentina now?
Pedro Heilbron - CEO
Yes, we are getting paid and -- yes. And we are monitoring sales closely so there's no speculation and not -- no sales six months in the future or that it doesn't change versus the regular pattern. So we are monitoring the regular sales patterns to make sure we stay within historical patterns.
Helane Becker - Analyst
Okay. And then my other question is with -- in respect to capital allocation. So you guys are committed to paying a pretty big percentage of net income out as a dividend. Have you talked to the Board about changing the allocation somewhat to pay less as a dividend and do a share repurchase program?
Jose Montero - CFO
Helane, this is Jose here. We have not made any changes in our dividend policy and our dividend policy is going to be maintained at our current 40% of previous year's net income. And in terms of a share repurchase program, right now all options are on the table. We haven't really made a decision yet, but we are currently analyzing that and all other options for returning value to our shareholders.
Helane Becker - Analyst
Okay, thanks. All my other questions were asked and answered.
Pedro Heilbron - CEO
Thank you.
Jose Montero - CFO
Thanks, Helane.
Operator
Michael Linenberg, Deutsche Bank.
Michael Linenberg - Analyst
And just two quick ones here. I want to go back to SICAD 2. So back in early June the Venezuelan government did say that effective early July airline tickets would be sold at the SICAD 2 rate. And then right up until that day or right before, the government backtracked.
And I'm curious whether or not it was within -- with consultations with the airlines whether the message back was that you would see significant inflation in local currency of fares to offset for that and/or significant capacity reductions.
And I would say that when the announcement hit the wire in the local press over that four week period, you had a slew of international carriers announcing significant capacity cuts, some that had been holding out like Lufthansa, United, Delta, American. I mean do you think that that is what drove that, your thoughts on that?
Jose Montero - CFO
I can't speak for the actions of other carriers, but the one thing that I will say, Mike, is that there really was no consultation from the government with the airlines in terms of what the exchange rate was going to be and really we have no official word on why is it that they backtracked on this.
Michael Linenberg - Analyst
Okay. And just one other quick one -- and I'm not sure there's much you can say on this, but when I think about the fact that you were able to repatriate several months at the rate that was in place at the time that those sales were made, you've heard about a few other carriers also repatriating -- not a lot, small amounts, some we are also hearing at the more favorable rate. But then we are also hearing some that are repatriating at a less favorable rate like SICAD 1.
There's obviously a quid pro quo here. I mean in the conversations back and forth, it would seem that some carriers are being able to get the more favorable rate. Are there non-financial considerations here? Is there a dialogue? Is there a promise to maintain service? I mean what can you say about that, why some carriers are doing a better job than others? And it doesn't seem to be that it would just fall on the ability of each company's negotiating party.
I mean there has got to be some quid pro quo here and maybe it's a non-financial consideration. Whatever you can shed on this topic would be very interesting.
Pedro Heilbron - CEO
Yes, this is Pedro here, Mike. There's not really a lot more we can add because we don't really know a lot more. And I think when you add it all up, it's not that there have been great differences or changes or that so much has been repatriated. But I did hear at one point that some small carriers that had small balances were authorized repatriations to like SICAD 1 rate. But again if you add it all up, it was not significant. I think the big balances are still there waiting for a solution. So there is really not a lot more I can add.
Michael Linenberg - Analyst
Okay. All right, well, thanks.
Jose Montero - CFO
Thanks, Mike.
Operator
Hunter Keay, Wolfe Research.
Hunter Keay - Analyst
Pedro, you guys have grown earnings for 10 straight years and that's something that you are very proud of. And I think we've had conversations about how you said you would be willing to trade a point of margin for EPS growth if that situation unfortunately were to present itself.
And we might be looking at that situation right now. I mean I know it's a little early on 2015 to start talking about margin guidance, but how do you feel about the prospects of growing earnings again next year in the face of what appears to be pretty material margin dilution?
Pedro Heilbron - CEO
Yes. Well, it is early, and I don't want to get ahead of ourselves, but we have work to do. Luckily we have a number of months ahead of us. We are proud of our track record. We are very, very confident about the business model, the strength of our hub, how efficient we run the airline. We have a diverse network with lots of possibilities. So we need to make sure we up our game and take advantage of all of what I have just mentioned and come up with a plan that will make 2015 another strong year for the Company.
And I'm confident that we have the -- all the possibilities to do that. But we are going to have a lot of work in the next few months.
Hunter Keay - Analyst
And so that is the main priority then above all else is to grow earnings for this Company going into next year?
Pedro Heilbron - CEO
We are very bottom line oriented and we have a Board that's very bottom line oriented. So we will do whatever we need to do to have a strong bottom line.
Hunter Keay - Analyst
Thank you very much.
Jose Montero - CFO
Thanks, Hunter.
Pedro Heilbron - CEO
Thanks, Hunter.
Operator
Thank you. And at this time, I'd like to pass the call back to Pedro Heilbron for closing remarks.
Pedro Heilbron - CEO
Okay, thank you all. Thank you for your support. Thanks for your questions. And have a great day and see you in the next earnings call.
Operator
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect and have a wonderful day.