Copa Holdings SA (CPA) 2014 Q3 法說會逐字稿

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

As a reminder, this call is being webcast and recorded on November 20, 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 third 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 third 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' third 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 third 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, Rafa. Good morning to all, and thank you for participating in our third quarter earnings call.

Last night, we reported our third quarter results, and as always, I want to congratulate our team for their hard work and dedication in delivering another quarter of strong financial and operational results.

As you know, we have taken concrete and decisive steps to reduce our Venezuelan currency exposure at a moment when we're also seeing some demand and yield softness in other markets, particularly in South America, where we have expanded capacity significantly in the past three years.

As a result, for the third quarter our revenues decreased 2% despite 9% capacity growth. Although passenger traffic grew over 6%, load factors decreased 1.7 percentage points year over year and yields almost 8% year over year. Unit revenues, or RASM, were down almost 10% for the quarter, or 5.4% when adjusting for a 10% increase in length of haul.

On the positive side, unit costs, or CASM, were 4.1% lower and almost 6% lower ex-fuel. As a result, we delivered a 16.7% operating margin.

Operationally, we again delivered world-class results, with consolidated on-time performance for the quarter coming in close to 91%.

During the third quarter, Copa Airlines' consolidated capacity grew 8.7%, and international capacity actually grew over 11%. When one considers the capacity we redeployed from Venezuela into other international markets we already served, our international capacity, excluding Venezuela, grew roughly 13%. This capacity was successfully absorbed during July and August high-season months but lagged in September, one of our main off-peak months.

For the fourth quarter, we expect unit revenues to continue to be affected by the measures we have implemented in Venezuela, as well as the other factors I mentioned before. However, we also expect to benefit from lower unit costs driven by lower fuel prices, as well as our efforts to reduce ex-fuel unit costs.

To give you an update on Venezuela, since our previous earnings call we received authorizations from the Venezuelan government to repatriate $24 million, with the majority of that coming in October. These repatriations represented requests made during 2014, specifically the months of January, February, March, and June, and were liquidated at the current Sicad I exchange rate.

We view this as positive, especially in the context that we're no longer accumulating bolivars. So, these payments gradually reduce our exposure and make our current service to Venezuela viable and sustainable.

Shifting to our expansion plans for 2014, during June and July we added three new destinations -- Ft. Lauderdale, in Florida; Montreal, in Canada; and Georgetown, Guyana -- which are preforming as expected. We also increased frequencies to several markets. And for December, we have announced new service to Campinas, our eighth destination in Brazil, with seven weekly frequencies, and we're also initiating two weekly frequencies to Santa Clara in Cuba.

With these additions, 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 point for intra-Latin America travel.

Turning to the regional economic environment, growth forecasts have been cut back, mainly in South America, due to slower growth in the global economy. According to the IMF, regional GDP is projected to grow about 1.3% this year, significantly down from prior estimates and previous years. Furthermore, in 2015, the region is expected to perform slightly better, with economic growth close to 2%, but significantly lower from prior levels seen this decade.

Panama continues to lead the region, with growth in the 6% to 7% range both in 2014 and 2015. The long-term strength and growth prospects of Panama's economy should continue to benefit Copa in the coming years.

More importantly, international traffic for Latin America continues to grow, and according to Boeing's current market outlook it is expected to be the second-fastest growing region in the world for the next 20 years.

That being said, due to the risks of further economic slowdown combined with our large capacity growth experienced in prior years, as well as the redeployment of capacity from Venezuela into existing markets, we have taken a more cautious approach with regards to 2015 capacity expansion. As a result, we will adjust capacity growth for 2015 to mid- to high-single digits. We will look to further optimize our schedules and networks and continue our efforts to further improve unit costs.

In terms of our 2015 network expansion, most of the capacity increase will come from the full-year effect of capacity added in 2014. However, there are several new destinations we can incorporate that we feel can add a unique fit to our network as well as contribute to our long-term competitive advantage as the most complete and convenient connecting point for intra-Latin America travel.

Last, but not least, we are excited to announce that Copa would launch its own loyalty program starting in July 2015. Our new program will be more tailored to our region and competitive environment, yet will also offer complete recognition and reciprocity with United's Mileage Plus program and all of Star Alliance.

Our new program is a foundational step towards knowing and better serving our most valuable customers, giving us greater flexibility to manage our own program's promotions and relationships. It will ultimately create significant long-term value for Copa. We will provide further information when we introduce the program details in March of 2015.

Until we launch our loyalty program next year, we will continue utilizing Mileage Plus as our frequent-flyer program. We are very thankful of our partnership with United and Mileage Plus, as they have contributed to Copa's growth into a world-class airline. Needless to say, we will continue to have United as our long-standing partner and strategic ally.

So, to summarize, we believe the fundamentals of our business model remain intact and relevant as ever.

We operate in growing and mostly underserved markets, where in most cases point-to-point service is not an option and markets can only be served efficiently through a hub. Our Panama airport has the best geographic location and infrastructure to serve the intra-Latin America market and accommodate our future growth. We have the most complete network for intra-LatAm travel and continue to strengthen it.

We're taking the necessary measures to adjust capacity growth to better reflect current market demand environment. We have competitive unit costs. We continue implementing the necessary initiatives to improve our passengers' experience and the delivery of our world-class product. And most importantly, we have a very committed and dedicated team who day in and day out run a very competitive and successful airline.

Proof of management and our Board's confidence in the long-term performance of our Company, the demand outlook in our region, and the resilience of our business model has been yesterday's approval of a $200-million (sic - see press release, "$250-million") share repurchase program, which as of yesterday's share price represents approximately 5% of the Company's market cap.

So, we expect to continue to provide value for our shareholders and are as confident as ever of the opportunities ahead and our ability to continue delivering industry-leading results.

Thank you. Now, Jose will go over our third quarter results.

Thanks, Pedro, and good morning, everyone. Thank you for joining us.

Let me join Pedro in thanking all of our coworkers for their efforts in running a world-class operation and delivering a solid third quarter, one in which we grew capacity by 9%, improved ex-fuel unit costs by almost 6%, and delivered strong operating margins.

Nonetheless, our year-over-year profitability was affected by lower revenues, which were down almost 2%, for the most part related to the yield impact of capacity reductions in the Venezuelan market.

Reported net earnings for the quarter came in at $66 million, or earnings per share of $1.49, compared to last year's net income of $126 million, or earnings per share of $2.84.

Excluding a fuel hedge mark-to-market loss of $28.3 million and a Venezuelan devaluation of $5.5 million, underlying net income for the quarter came in at $99.8 million, or earnings per share of $2.25, compared to last year's third quarter underlying net income of $116.2 million, which excludes a fuel hedge mark-to-market gain of $9.8 million during that period.

With respect to traffic, revenue passenger miles increased 6% year over year, driving the load factor for the quarter to 76.3%, a 1.7-percentage point decrease compared to last year's third quarter load factor. This, combined with 7.7% lower passenger yields, led to a 9.9% decrease in unit revenues. However, when adjusting for a 10.2% year-over-year increase in length of haul, yields for the quarter decreased 3.2% and unit revenues, or RASM, decreased by 5.4%.

Operating revenues for the quarter came in at $663 million, or a 2% year-over-year decrease on 9% capacity growth. This was primarily driven by lower yields due to capacity reductions in Venezuela, as well as softness in yields from some South American markets.

On the expense side, third quarter operating expenses increased only 4% year over year, leading to a 4% decline in cost per available seat mile. Additionally, CASM ex-fuel came in at $0.064, or 5.8% lower, for the quarter, mainly from lower sales-related expenses and cost reduction efforts.

Moving on to operating earnings, consolidated operating earnings for the quarter came in at $111 million, which translates into an operating margin of 16.7%, down year over year versus last year's third quarter operating margin of 21.8%.

In terms of non-operating income and expense, third quarter results reflect a net non-operating expense of $39.4 million, consisting mainly of a net interest expense of $3.3 million and a $36.2 million loss in the "Other, net" line, mainly due to $28.3 million related to the mark-to-market of fuel hedge contracts and a $5.5 million translation expense related to the devaluation of the Venezuelan Sicad I rate.

This quarter, we have also reported an income tax expense of $5.7 million. For full year 2014 and 2015, we expect our income tax rate to be between 11% and 12%.

Turning to fuel hedges, we ended the third quarter with hedges for 31% of the projected volume for the fourth quarter, using crude oil and jet fuel swaps: 16% of our volume for this period is hedged in jet fuel at an average price of $2.74 per gallon, and 15% in crude oil at an average of $89 a barrel. In addition, for 2015 and 2016, we had coverage of approximately 27% and 16%, respectively, mainly in jet fuel and at similar prices and using the same instruments.

Although the recent reduction in fuel prices has resulted in a sizable non-cash mark-to-market charge, we will continue to execute hedges according to our hedging policy.

In terms of fleet, during the quarter we received another three of our eight scheduled aircraft deliveries for the year, which are all Boeing 737-800s. So, we ended the quarter with a fleet of 96 aircraft: 52 737-800s, 18 737-700s, and 26 Embraer 190s.

During the fourth quarter, there were two scheduled deliveries, which were already received in October and November. So, our plan is to end the year with our current fleet of 98 aircraft, with an average age of approximately six years.

Turning now to our balance sheet, we continue to have one of the strongest balance sheets in the industry, as cash, short- and long-term investments at the end of the quarter totaled $1.1 billion, which represents more than 41% of last 12 months' revenues. Even excluding our cash currently in Venezuela, the Company still had over $605 million, or 23% of last 12 months' revenues, in dollar-denominated cash.

It is important to emphasize that we have not accumulated bolivars as of the third quarter of this year, and our balance of bolivars as of October 31st is $499 million, compared to $527 million at the end of the second quarter.

In terms of leverage, we still maintain a very favorable position, with a total net debt to equity ratio of 0.5 times, one of the strongest balance sheets in the airline industry even if you exclude our cash in Venezuela.

Precisely due to our solid capital structure, we are pleased to announce that yesterday our Board of Directors approved a $250-million share repurchase program. This program is yet another way of returning value to our shareholders, besides our dividend which continues to be set at a payout ratio of 40% of previous year's net income.

To close, we would like to provide some more color regarding our operations in Venezuela, going forward. Under current capacity, Venezuela should represent 6% to 7% of our revenues in 2015, and they should be predominantly dollar-based. So, going forward, and under these circumstances, we believe that Venezuela will be a sustainable part of our business.

So, to recap, demand for air travel in our region continued to expand, albeit at a slower pace. Yields are and will continue to be affected mainly by capacity reductions in Venezuela. We have one of the strongest balance sheets in the industry. And we continue to return incremental value to our shareholders.

Turning now to our guidance for 2014, given our performance, the economic outlook in the region, and current trends, we're updating our full-year guidance as follows. We're expecting our capacity growth in terms of ASMs to be at approximately 9.5%. Load factor is expected to come in at plus or minus 77%. We are lowering our RASM guidance to plus or minus $0.13. We're also lowering our CASM ex-fuel guidance to plus or minus $0.066. And we are also lowering our effective fuel price assumption for the year including into-plane and net of hedges to approximately $3.05 per gallon. As a result, we can now narrow our full-year operating margin guidance to plus or minus 19%.

Today, we are also providing preliminary guidance for next year, 2015, based in our operational plan and demand outlook for the year. As such, given our Venezuela-related adjustments and our recent growth, we expect to adjust our operating plan to the overall economic trends in the region. This has also resulted in lower operating margin guidance for the year.

ASMs are expected to grow plus or minus 7%. Load factor is expected in the range of 76%. RASM is estimated to come in at plus or minus $0.122. We expect CASM ex-fuel to come in at plus or minus $0.066. And with respect to fuel, we're assuming for the year an effective price per gallon including into-plane and net of hedges of approximately $2.80. As a result, we expect operating margins to be in the range of 15% to 17%.

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) Savi Syth, Raymond James.

Just on the stage length, it was up quite a bit this quarter. I was thinking, wouldn't it be up at a similar amount? I'm guessing that's driven by the capacity cuts in Venezuela. And if it is going to be up as much going -- over the next few quarters, I was just wondering why maybe unit costs weren't going to be down more in 2015?

Savi, if I got the question right, you're asking about our stage length going up for the quarter? So, we -- indeed, this is related to both the shift in capacity that we've made in Venezuela, but also due to the growth, kind of the general growth that we have in our network.

For next year, stage length is also going to grow somewhat, but the way that we see it with our CASM ex-fuel for next year is $0.066 at this time.

So, you're not seeing any benefit from the increase in stage length?

I think that we're seeing I think -- we're basically seeing as it is, with the $0.066. I think we're implementing a lot of cost initiatives during next year, and as those come in line we will, if anything, adjust it. But for now, we're seeing the $0.066.

And there are always inflationary pressures that go against the efficiencies of a higher stage length. So, we're balancing that out also.

Got it. And then, along the cost questioning line, are there implications with implementing the loyalty program? Any costs that go along with that?

That is correct, and that is embedded in our guidance of course and in the $0.066 Jose just mentioned. So, the new frequent-flyer program is going to add value to the Company. It's going to improve our bottom line, but that's not going to happen in 2015. 2015, it's going to be mostly negative in terms of the costs that are going to be incorporated in our structure. So, by 2016, we should see a benefit.

And, Savi, just to add to that, as Pedro mentions, this is embedded into our ex-fuel CASM guidance. And the value of that first year is probably, in the cost side, going to be about $20 million, you can assume.

Okay. Got it. Helpful.

Bernardo Velez, GBM.

I was wondering if you could share with us some of the performance in terms of demand and yields excluding Venezuela during the quarter?

Ex-Venezuela is what you're asking? We've seen some yield weakness and slowness in demand growth, mainly in South America; again, besides what's directly related to the reduction in capacity in Venezuela. I would say that mostly in Argentina, but also in Chile and Peru.

On the other hand, Brazil has been okay, I would say, so far. Demand in Brazil has been holding on. A slight softness in yields, but actually less than in the other markets I just mentioned.

Okay. Perfect. And I was wondering if you guys could give us more color on your expectations for your own frequent-flyer program? [What is your thinking in probably partnering] with an already expert company in the business? And how much investment will be needed?

Well, this is a program that we're building ourselves. We have been working at it for some time. And as I mentioned earlier, from the cost side next year it will be around $20 million for the roll-out of the program in the first year.

Right. And there will be significant benefits, or at least that's what we expect. But, again, that will be 2016 and beyond.

Okay. Perfect. And I guess -- or, could you comment on what would the impact on demand will be once the agreement with Mileage Plus? And meaning how much of your revenues from this segment?

We do not expect an impact in demand. First, we're going to stay with Mileage Plus as our own program until end of June of 2015. And secondly, we will keep almost full reciprocity with Mileage Plus and also with the other Star Alliance carriers. So, we're not expecting -- at least not a meaningful or significant impact to demand. It could even be positive.

Okay. Perfect. And lastly, you were mentioning your jet fuel and oil prices that your hedges have for fourth Q, and I just wanted to make sure. You mentioned $2.73 for jet fuel and $89 for oil, right? That's for fourth Q?

Yes. Correct.

And could you share the numbers for 2015 and on to 2016?

For 2015, essentially it's about $2.74, and most of our hedging for the out years, for 2015 and 2016, is at around $2.74, and most of it is in jet fuel.

Okay. Perfect. So, given the current prices that we are watching on jet fuel, what would you say will be the impact, or the hedge loss, for next quarter if current prices remain?

Well, the way that we look at is that we have about one-third of our volume hedged and I think for every -- the way that we see it actually is that for every $1 in change in the price of oil, in the crude price of oil per barrel, that equates to about a $5 million benefit to ourselves, including the effect of the hedge. So, it's a net positive for us, as fuel fluctuates downward.

Okay. Perfect.

Duane Pfennigwerth, Evercore ISI.

I wanted to ask you about the implied revenue from your guidance, basically how literally we should be taking that? Because it looks like it implies yields in the fourth quarter down about 15% versus the down 8% that you just did. Is that what you're seeing? Or, should we be interpreting this guidance differently?

You're talking about 2014 guidance?

Fourth quarter.

Yes, the fourth quarter, because based on your load factor and your RASM guidance, it looks like it implies yields down about 15% in the fourth quarter. And I just want to check, is that actually what you're seeing? Or, is that --?

Yes, that's correct. We're seeing a drop of yields of around 10% to 13%.

Okay. So, perhaps the RASM decline in the fourth quarter is larger than it was in the third quarter?

Yes, you can assume that.

Okay. Maybe just some color on why?

And then, just as a follow-up, I wanted to ask you about the shape of that recovery in 2015 to get to the down 6% RASM. Is it something similar looking in the first half of the year to what we've seen in the second half of 2014, and then assuming sort of positive RASM in the back half of 2015? Any help you can give us about the shape of that recovery would be helpful.

Duane, I'll start, and then I'll let Jose give you more specific information. You first asked, well, the why? And it's been -- we were, I guess, mostly successful in replacing the Venezuela capacity during the high-season months of July and August, but had a much tougher time in September, replacing that capacity with other, let's say, strong-yield markets. So, we saw that in September; we were not able to replace that capacity in September.

And in the fourth quarter, we're also going to have some issues -- but that's embedded in our guidance -- trying to replace all of that Venezuela capacity. Plus, we also have gone pretty much to [a dollar rates]. We have been able to shift our sales to dollar demand, away from the very high-yield bolivar demand. So, that is also a greater impact from what we were expecting at first.

In 2015, what we're seeing right now is that that will continue, and we're not sure exactly when that recuperation will begin.

I don't know, Jose, if you want to add to that?

Historically, the second half, all else being equal, is usually better than the first half. But in terms of 2015, I would say it's a little bit too early to tell. We have limited visibility into [the complete] recovery at this stage. But we probably would see some -- a better performance during the second half of 2015; also given that then all the action plans that we have been performing over the last several months are going to be coming to fruition then.

And I would add to that, obviously what I mentioned before, that we're seeing some softness, or slowness, in other South American markets. That is also the markets were actually up, were actually very strong. Then, that would help us make up for the Venezuela reductions, but that's not been the case.

So, we're dealing with both things, even though it's mostly a Venezuela issue.

Okay. I appreciate that. And then, just lastly, I wonder, Jose, if you could just tell us year to date or for 2014 how much Venezuela revenue has been and what the bolivar portion of that has been?

For the first part of this year, it's been about between 15% of our revenues. And what is interesting to mention is that over the last couple of months, the actual portion of our revenues in Venezuela that are in bolivars has actually come down. We've been pretty successful shifting the demand to a dollar-based demand. And now, about, I would say, between two-thirds and three-fourths of the demand is dollar-based demand.

So, I think that that is a very important thing to mention, that we've been successful at stopping the accumulation of bolivars and shifting the demand to a dollar-based demand.

For 2015, Venezuela revenues are going to be plus or minus 6% of the total. And, again, 80% or 75% of that is dollar demand.

Thank you.

Michael Linenberg, Deutsche Bank.

This is actually Catherine O'Brien, filling in for Mike. I was just wondering how the routes that you have reallocated capacity to from Venezuela ramping up versus your historical average? And do you have any sense in the forward bookings how these look to be ramping up, going forward? And I understand there's been a little bit of a demand impact in the region, but do you have any sense of how long it might take you to ramp up to full run rate profitability on those routes?

Hard to tell right now. It's really hard to tell. We only have visibility three months into the future. What's beyond that is really hard to forecast. Supposedly Latin America is going to be doing a little bit better next year than this year. But again, it's still early.

What we saw in the third quarter, and it's third and maybe fourth quarter also, we saw higher capacity growth than in the previous, let's say, six quarters in overall capacity coming into the markets of Latin America. That growth was mostly from US to the Caribbean; it grew faster. Also, some from US and Mexico to Central and South America, but it was mostly US to the Caribbean. US to the Caribbean doesn't really affect us. US and Mexico to Central and South America does compete with us.

So, we saw faster growth in the third quarter, faster capacity growth. So, that kind of adds to the equation.

We are, as we have guided to, being more cautious with our 2015 capacity and how we allocate 2015 capacity. Most of our growth next year is going to come from the full-year effect of what we put in place in 2014.

Okay. And then, just on that competitive capacity front, do you see that kind of abating as we move into the year-end and next year? Or, do you think it's going to be at about the same high level? And is that what you're baking into your unit revenue forecast?

Well, what we see from the other Latin American carriers is capacity discipline in terms of aircrafts on order and the plans they have announced. So, so far, what we've seen from our peers in the region is what I would call discipline. A lot of discipline.

From the US, it's hard to predict. But I guess our guidance is how we see things today. And in the past, I should say that we've been pretty accurate with our preliminary guidance. We are not expecting that to be much [different] this year. But again, it's very early still.

Okay. And if I could squeeze one more quick one in? What does your delivery schedule look like next year compared to the aircraft that you have coming up towards the end of their leases? Does your 7% capacity forecast for next year imply that you'll maintain a flat fleet or potentially shrink or grow that fleet?

Right now, we have 11 deliveries in our plan, and we also have five lease returns. So, we have a net of six aircraft. But we're working on initiatives which could lead to between two or zero net additional aircraft in 2015.

And again, the 7% comes mostly from the full-year effect of what's in place this year. We don't think it's going to be less than that. It could be slightly higher if we implement certain utilization improvements. And we're growing [engage], but it's mostly full-year effect.

And again, with the initiatives we're putting in place, we're probably only going to grow between two and zero net aircraft, but we have not published that new plan yet. We will do that once it's settled and known.

And just to add to that, that is -- of course, our guidance reflects the way that we see our capacity, our overall capacity growing next year.

Okay. So, that 7% implies that you only would maybe have zero to plus two net aircraft next year? Or, you're not --?

Yes.

Okay. All right.

Hunter Keay, Wolfe Research.

I wonder if we can parse back a little bit the RASM guide in the fourth quarter as it relates to the yields and load factors? Can you remind us how Copa fuel surcharges? And how much of the decline in RASM in the fourth quarter is from just weaker underlying demand versus just fuel surcharges coming off? And just, again, at a bigger picture, how you guys generally move your fares along with fuel?

Well, it's mostly related the way that we see it mostly to Venezuela in the fourth quarter, on a year-over-year basis. But as we've mentioned earlier, there is some -- a little bit of a slowdown in some other South American markets, mainly Argentina and a couple of other South American markets. But it's mostly related to that. More than necessarily an impact related to fuel at this stage.

Okay. And to follow up on something, Pedro, you said just a minute ago about how you don't have visibility much more than three months, I understand that; most airlines don't. But given the dynamic nature of the business right now, why give a 2015 RASM guide?

I know that's your custom and you do that and, for sure, we greatly appreciate it you guys' doing something like that. Really. We really do; it takes guts. But it's very hard for you guys to forecast demand more than three months out in a good operating environment. Did you guys think about not giving this RASM guide for next year? And why should we model to it if you can't see demand more than three months out?

Well, this is one earnings call where we felt that we had to give you that guidance. And 80% of it comes from the impact of Venezuela, which we can predict now that we have shifted demand to dollars, between 75% and 80% of demand, and that could be even higher. So, we've shifted demand to dollars. So, we can pretty well project out for the year Venezuela. And again, that's most of the impact.

Yet, the other 20%, it's hard to forecast at this point. But again, we've done it before, and we felt that this time we could not not do it.

Yes, I appreciate that, Pedro, and thank you for doing it, by the way. And one more quick follow-up, on the buyback? Should we think about --? How should we think about just bracketing the timeline on this? I know you guys said you're going to be opportunistic, and that's great to see. But do you expect to have it done by the end of next year? Does this authorization expire? Any kind of color would be great.

Before Jose answers, I must say it. I think when I was doing my part I said $200 million instead of $250 million. So, I just want to straighten the record. But it's $250 million, obviously, as Jose mentioned during his part.

So, in our $250-million buyback program, our Board did not put a time limit on it, on its approval. So, we'll start executing the program. It's an open-market program. And of course, this is in addition to our 40% dividend payout. So, it's we believe a proof that both management and our Board are very keen on returning value to our shareholders.

Thanks, guys.

Daniel McKenzie, Buckingham Research.

A couple of questions. Wondering if you can talk a little bit more about Argentina? The country is reportedly short of dollars. The economy is in pretty rough shape. Does it make sense to adjust capacity there, if that's a source of yield weakness? It's just unclear to me if that improves.

And then, separately, related to that, if you can talk about the repatriation of money from Argentina, just given some of the news, the media reports, about the country having a hard time with dollars?

I must say that our flights in Argentina are doing well. We have good load factors, and from that standpoint see no reason for reducing capacity. It's a market that we've served for a long time right now, and we have a following. And again, our load factors are doing well.

We have seen yields softness, and there has been higher taxes. So, we've had to lower prices to keep demand and to keep our leisure part of traffic, work with our wholesalers, et cetera. But load factors are still healthy and the flights are still doing well.

And in terms of repatriation, Dan, we're repatriating funds out of Argentina on a daily basis, and we don't really carry a significant balance of Argentine pesos at this time.

Okay. Very good. And then, just going back to Investor Day commentary and the outlook for Venezuela to impact margins by 100 basis points this year and next year, I think a number of investors were looking for a 17% to 19% margin guide.

And I'm just trying to back into the 200-basis point differential, and I'm just wondering if you can help reconcile this from a slightly different angle? And I guess what I'm trying to preempt in this question here is investors that are concerned that there's serious fundamental deterior in the business, and it looks like part of that deterioration in the guide is economic deterioration just in the region.

But I'm also wondering what part of the margin hit is from underutilization of aircraft, just given the slower growth? So, fleet count up, potentially, here in 2014. Headcount is up, with capacity essentially flatlining, which of course puts pressure on non-fuel CASM versus what it otherwise would be. Is there --? To what extent is that something that's a hit to the margin next year?

A few things. In the last earnings call, I think it was Jose who when answering a question said that we were expecting the operating margin impact of Venezuela for the rest of the year to be three percentage points. That was higher than what we had said during the earnings call, and that was directly related to additional [costs] and more dollar sales. That ended up being higher than those three percentage points. It was actually higher than that in reality.

I guess we underestimated the impact, and we also underestimated our ability to shift that capacity to other healthy yield markets, even if not as high.

In terms of our ex-fuel unit costs, we've actually been bringing them down. So, we feel we have that under control. And even though we're guiding to similar ex-fuel unit costs next year, that makes up also for additional frequent-flyer costs, inflation, and other things. So, even keeping them flat is an achievement under those conditions, and again, it means that we have them under control.

And the only thing I would mention, Dan, is that I think that our -- from what we've seen, we should expect aircraft utilization that you mentioned to go actually up next year, as well. So, we should expect efficiencies there.

Okay. Very good.

Stephen Trent, Citi.

This is Kevin Kaznica, stepping in for Stephen. I guess, just really high level, when Steve met you guys in May, Joe Mohan somewhat talked down VivaColombia's competitive threat, and then we see months later that Joe has actually joined VivaColombia, and the carrier supposedly has plans to establish operations in Panama. Is this part of the competitive threat that you're seeing? And is that kind of baked in 2015 guidance? And are there other specific regions that are seeing stiff competition?

In our 2015 guidance, we have embedded just the normal competition we're used to, maybe a little bit more than normal, combined with the slowness in the economies of the region, which is kind of what we've seen in the second half of the year. So, we're projecting the second half of this year to continue in 2015. Again, a little bit higher growth in capacity versus previous quarters and slower economic growth. So, those are the two things that are embedded in our 2015 guidance. And that's what we're seeing right now, and that's what we should expect.

Great. And just to kind of circle back to your new loyalty program, I know you've talked about the costs in 2015. And I don't even know if you can answer this, but could you estimate the number of repeat customers who might join, especially since you said there's going to be reciprocity with Miles Plus and the Star Alliance members? And do you think you might have to offer any special incentives in order to entice customers to join? So, maybe some more incremental costs just to get people to join the program?

Those details are not available yet; we'll make more information available in March. But I think what's important is that, either way, if a current Mileage Plus Copa members joins the new program or stays where they are, they will still earn miles when they fly us. So, it should not have a significant effect on demand.

But obviously, the more people that transition to our new program, the better for the program and for the value it should add to Copa. So, you can assume that we're going to want to incentivize that.

Okay. That's very helpful. And then, was there any unusual factor behind your 3Q taxes coming in so low? And I think you guided toward a lower 2014 tax level, as well?

It's just timing of tax payment and deferred taxes. The full-year tax expected rate, as I mentioned during my intervention before, is between 11% and 12%, both for this year 2014 and for 2015.

Great. And then, finally, just to come back to Argentina, I've had some clients saying that the situation there is kind of somewhat like [Venezuela 2.0-esque]. The currency arbitrages there. And the competitors are pulling out of that market. And I think your current exposure, top line, to Argentina is like 8%? And it sounds like you guys didn't plan to reduce any capacity to this market?

We are keeping capacity as is. Yields are down. So, if any, the market is less profitable than before. But it's a market with high load factors and good profitability. We see no reason right now or no need to reduce capacity. But obviously, as we know, sometimes things change from one day to the other. But that's not what we're seeing or what we're expecting right now as we speak.

But we're of course following it very, very closely.

Okay. Great.

(Operator Instructions) Bob McAdoo, Imperial Capital.

Just a question on the loyalty program. Could you give us a sense of what percent of your customers are actually [interline] customers who would be interlining back up through the Continental/United system versus the number of passengers that you carry in and out of Panama who don't really touch the United system, so we get a sense of, of your customer base total, what are the kind of people who would likely -- they're in the United program because United is what you had, but who have really more of an interest in an intra-Latin American kind of program, because that's really where the guts of your business seems to be?

When we prepare for these calls, we try to anticipate all the questions, and there's always someone that comes up with a question that we did not anticipate and that we're not ready for. So, I cannot give you a detailed answer, but what I can tell you is that most of our Mileage Plus passengers today are Mileage Plus/Copa passengers, or people that accumulate most of their miles in Copa flights.

Yes, that's what I was trying to [figure]. As I sit and look at your network, it seems like the majority of the people are not people who are going to go up to Houston, or whatever. The majority of the people you carry are going to go back and forth between the Caribbean and South America, or whatever. And they're in Mileage Plus because you're in Mileage Plus, but there isn't any particular affinity that they have with United, per se, and that it wouldn't -- that you would guess that the majority of your customers would be -- if there's something that's tied to their world, there would be no reason for them to really necessarily hang on to United, especially --. I assume when you talk about reciprocity, they'll still be able to -- if they earn miles on you, they can burn those miles by going somewhere on the United system [all over] the world?

Correct.

Is that correct?

You're correct. You're 100% correct.

And I read something that said, some news note that said something about that yours is going to continue to be mileage-based rather than dollar-based. Is that correct?

That is correct, yes.

Okay. All right. And have you done some recent cutting of [capacity], in terms of reaction, in terms of just squeezing and rearranging stuff, in terms of you talked about things that aren't working? Obviously, Venezuela is one of them. Have you done some recent cutting in Colombia? Somewhere I got that impression. Is that correct, that there's some Colombian markets that you pulled out of recently that are -- or greatly reduced?

That was earlier in the year, or late last year, that we actually reduced our exposure to the Colombian domestic market. That was done several months ago.

But nothing new? And as I was trying to figure out, it looked like a lot of the -- some new capacity and maybe this is much -- or maybe the data that I was shown that was not current, but --?

Actually, Bob, I would say also that during the second quarter we pulled out some capacity out of, again, the domestic Colombia market. So, yes, there was some -- some of it came in during the latter part of the first half of this year.

And in terms of reallocating airplanes, or whatever, is the -- did you say that Brazil is one of these places that seems to be maybe some place that has accepted some airplanes and doing kind of okay? Or, where else is it?

(multiple speakers)

And when did you put in a second Las Vegas flight? Somebody mentioned that to me, too.

That was, if my memory --.

Last year.

It was end of last year.

Yes, last year.

That was at the end of last year.

Again, (multiple speakers) kind of out of date. Okay.

So, we've taken capacity from domestic Colombia, put it in international markets. We've taken capacity from Venezuela. Our competitors have taken some capacity out of Venezuela also and put it in other international markets in the region.

So, what we're doing right now is that we are looking at our whole network, and we're going to be moving things around. Again, next year we're going to grow maybe two or no or zero or none in terms of new aircraft. And we'll get to the 7% or better with the full-year effects of what we've done this year.

But more important, what we're doing is looking at our whole network and looking to optimize our network and shift capacity from where there's better demand, away from where the capacity was not needed and no doing so well. So, we're actively engaged in accomplishing that.

And one final thing. In terms of all the other capacity that everybody else has dragged away from Venezuela, are you seeing much of an --? I assume that when you go through all this thing, you seem to be one of the larger carriers still in Venezuela, in terms of opportunities for those people who really do have to get to Venezuela.

It would appear given the number of people who have pulled back capacity, that from the point of view of servicing business customers that you have a -- that you probably still have a pretty good business there? And is it clear --? Can we think of that, the current Venezuela dollar-based Venezuela, as profitable? And is it -- in terms of margins, would it be at kind of roughly average of what everything else is because of the pull-backs that other guys have made? Or, how should we think about how Venezuela is now?

It's still a strong market. And yes, we're probably the largest international carrier in terms of capacity, and it's a strong market. It's a good market with mainly very high load factors. So, you know when load factors are high, you can revenue management those load factors. We're selling mostly dollar demand. But with healthy load factors.

Okay.

Savi Syth, Raymond James.

Maybe just a bit of a higher-level question. If you look at non-Venezuela, your rest of the system, in 2013 it appeared that margins there were much [below] -- maybe [around the 15%] level than the kind of historical 17% to 20% level that you've seen in the system. And maybe part of that was due to a lot of capacity being added in 2012 and 2013.

Has something changed in the new markets that have added in 2012 and 2013 that makes them lower margin than historical? Or, something in the landscape that has changed that makes it lower than historical? Or, are we just kind of going through the cyclical Latin America softness and you should see a return to high margin?

I understand your question, and what I could say maybe big picture, high level, is that the stronger-than-normal Venezuela business fed into the whole network and permitted capacity growth in other markets to be maybe more profitable than would have normally been a normal [spool off]. So, if you look at the last three years or four years, we grew at a very fast pace and our profits grew at the same time, and that's not very normal. So, Venezuela was important in achieving that.

And now, we have to rebuild it all. And that's why we're putting so much emphasis in optimizing our network, in putting capacity where it makes more sense now that there's less a [fit] -- very-high-yield [fit] from Venezuela.

So, I think it's going to be a process that will probably take us a few years, and especially considering that two years ago every market in Latin America was very strong, was booming, was growing double digits. So, now that has slowed down. There's still growth. The markets are not going back. There's still positive growth, but it's not as fast and a lot of other capacity has come in.

So, we think it's going to take a couple of years to optimize the network, for the waters to find their level and start rebuilding those margins.

So, when you say rebuild it here, you're really talking about slowing growth here and rebuilding the network that way?

Well, I would say partially, but also in finding markets that maximize our profitability. So, we're in that process of adjusting capacity in specific markets and managing the network that way.

Got it. And then, one last question. You do talk about more USD tickets versus bolivar tickets. How does USD-based ticket sales from a yield perspective compare to Venezuela bolivar-based tickets? What kind of a difference is there on the unit revenue perspective?

I would say that there is -- that's certainly a reduction in yields in the US dollar demand. The one thing that I would say is that our Venezuela US dollar demand and it's yield is still higher than other parts of the network. So, we do have we believe still a maintenance of good yields in the Venezuela market.

[Okay.]

Hunter Keay, Wolfe Research.

As it relates to loyalty program, Pedro, remind me if this correct, but don't you guys have sort of a hodgepodge agreements with like nine different banks as it relates to the cobranded credit cards? And do you have --? Does the migration to a single -- to your own mileage program allow you to maybe sort of consolidate that up? And is that a bigger opportunity longer term for you guys to do something that we've seen from some of the US airlines, in terms of sort of signing bonus and big affinity programs with regard to advanced purchase of miles? How does that tie in to your cobranded credit card agreements? And is that a longer-term catalyst?

So, what you're saying is correct, and it will become an important part of our program. But it won't all happen right away, because those banks have their own contracts [with] their own termination clauses and timing. So, that will happen gradually in the next few years.

Got you. Okay. And one more philosophical question as it relates to fuel hedging. I don't know if this is for Jose or Pedro. But I'm wondering if it makes sense to --? The way you hedge fuel, given the fact that Latin American economies as so exposed to commodity environments, it's probably not a coincidence that as commodity prices are declining, Latin American economies are weakening. So, (a) does it makes sense to hedge at all, and (b) does it make sense to hedge against fuel, in the sense that you should protect yourself from lower oil prices, not higher oil prices?

I think that question is way too philosophical for today.

It's true, right? Think about it. You guys are getting kind of hammered a little bit on the hedges; you're not the only ones. But maybe we can take it --? Rather than hedging against lower fuel prices, let's maybe talk about the philosophy of hedging fuel at all. How about that?

It's an interesting point. For now, we're following what we have. We have a certain volume already set for 2015. And for now, we're just --. The market, as you know, the fuel market right now has been very volatile over the last month. So, we're just paying close attention and looking for opportunities if they come out and following our policy.

Okay.

Daniel McKenzie, Buckingham Research.

It's really an "educate us" question. One of the questions I get from investors is, why sell 25% to even one-third of the tickets in bolivars? And I understand it's illegal to sell tickets in Venezuela in US dollars; so, you have to sell them in bolivars. But I guess I'm --. One of the concerns I get from investors frequently is that there's going to have to be a write-off here, because they're looking at other industries. And so, I guess I'm wondering, from your perspective, does it make sense to trim capacity by that 25% to 33% and just sell 100% US dollar-based tickets and eventually burn off the bolivars in that way? I'm just wondering if you can help investors think about that?

We've shifted, as we've mentioned, sales to demand outside of Venezuela, which is where you can buy in US dollars. In Venezuela, we have to sell in local currency. And we also have obviously local currency expenses which we are covering with our local sales.

I understand what some investors are saying, and maybe it's easier said than done, but we're operating in the Venezuelan market, and we need to have some local -- some capacity available for local demand.

We're still reducing our outstanding balance. Maybe we could reduce it at a higher rate, but it's kind of what we need to do to continue in the market, to serve that market, to serve the local demand. So, we need to find that balance, and we think we're there.

But I understand what you're saying; maybe it's just not that easy to do.

Very good.

This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Pedro Heilbron for closing comments.

Great. Thank you. Thank you, all. This concludes our third quarter earnings call. Thank you for being with us, and thank you for your continued support. We will see you next time. Have a great day and a great weekend.

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