Copa Holdings SA (CPA) 2015 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Copa Holdings First Quarter Earnings Conference Call. (Operator Instructions). As a reminder, this call is being webcast and recorded on May 7, 2015.

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

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

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

Copa Holdings' first quarter financial results have been prepared in accordance with International Financial Reporting Standards. In today's call, we will discuss non-IFRS financial measures. A reconciliation of the non-IFRS to IFRS financial measures can be found in our first quarter earnings release, which has been posted on the Company's website, copa.com.

In addition, our discussion will contain forward-looking statements not limited to historical facts that reflect the Company's current beliefs, expectations, and/or intentions regarding future events and results. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially, and are based on assumptions that are subject to change. Many of these risks and uncertainties are discussed in our Annual Report filed with the SEC.

Now, I'd like to turn the call over to our CEO, Pedro Heilbron.

Thank you, Rafael. Good morning to all, and thank you for participating in our first quarter earnings call. I first want to congratulate all of our coworkers for a solid quarter. Despite the downturn in the regional economy, we're doing a good job in controlling what we can control best, namely cost and (inaudible) delivery. We're confident we will come out of this down cycle as an even stronger and more efficient airline.

Some of our main highlights for the quarter, our load factor came in almost 2 points lower year over year, at 76%, as passenger traffic grew close to 6% on 8% capacity growth. At the same time, yields came in 16% lower, which led to an 18% drop in unit revenues or RASM.

On a positive note, lower unit revenues were partially offset by lower cost, as our CASM decreased 13% from $10.07 to $9.03. And our ex-fuel CASM came in 3% lower at $6.03. As a result, we delivered a solid operating margin of 20.1%.

On the operational front, we continued delivering the world-class product our passengers expect from us, as system-wide on-time performance came in at 90%, consistently among the best in the industry. However, as you can see from our earnings release and updated guidance, we're facing some addition demand weakness for air travel in the region since our last earnings call, mainly as the result of weaker economies and currency devaluations, especially in South America.

Revenues for the quarter came in almost 12% lower year over year, driven mainly by a 16% drop in yields. Our consolidated load factor was down 1.8 percentage points, mainly driven by lower demand in Brazil. That said, yields in South America were down approximately 28% year over year, driven mainly by the translation to all-dollar sales in Venezuela.

However, we also saw a decline in yields in other South American markets, most of which experienced a decrease close to 10%, and in the case of Brazil, closer to 15%. A large portion of the yield decrease can be attributed to a softening in demand resulting from currency devaluations against the US dollar. Most South American currencies devaluated over 10% year over year, and in the case of the Brazilian real, close to 30% year over year.

In our particular case, even though yields in Venezuela are certainly down year over year, demand there is trending very similar to our expectations. However, Brazil has definitely weakened further since our last earnings call back in February, as its currency has been the most affected.

Most of the devaluation came in the early part of March, which has placed additional weakness both on yields and load factors in the second quarter. In order to manage this demand weakness, as of June, we will reduce capacity in Brazil, representing about a 4% reduction year over year in the second half of the year in that market, reversing most of the capacity added during the second half of 2014.

In light of these changes, we're now expecting 2015 capacity growth of approximately 6%. The capacity increase will come mostly from the full-year effect of our 2014 capacity additions, and some new destinations we're adding this year.

Regarding new destinations, we have already announced New Orleans, our 11th city in the US, which will start in June and Puebla and Villahermosa, our fifth and sixth destinations in Mexico, which will start in August.

In terms of our fleet, even though we will receive nine new Boeing 737-800s during the year, they will all serve as replacements, and we now expect no aircraft growth in 2015, closing the year with 98 aircraft, but with a younger and more efficient fleet.

Despite the current economic weakness, we continue to look towards the future with great optimism for Latin America air travel. Evidence of this is the 61 aircraft order we signed last month with Boeing for 737 MAX 8 and MAX 9 aircraft, with a new more [efficient] engine technology, which we expect will save us 14% in fuel when compared to our current 737. This order consists of deliveries starting in 2018, and provides us great flexibility in terms of growth or replacement aircraft.

The 737 MAX fleet will continue to position Copa Airline as the leader in terms of service and efficiency in our region.

In March we reached another important milestone when we announced the branding and key features of our new loyalty program, ConnectMiles. Early consumer response has been very favorable. ConnectMiles will provide Copa with a powerful tool to strengthen our customer relationship, improve customer service, and extend special benefits and recognition to our most-frequent fliers.

Because of our membership in Star Alliance, our ConnectMiles members will continue have earning and redemption access to the world. Connect Miles will formally launch on July 1st. Having our own loyalty program adds a fast, powerful, and flexible marketing tool for Copa.

Previously it took us months to launch a loyalty promotion. But soon we will have the capability to do so in just days. This marks the beginning of a new, more sophisticated marketing era for Copa. And it's another reason why we're excited about launching the program, and realizing the potential it brings to our Company in the midterm.

So to summarize, we're very pleased by our first quarter results. The recent economic environment has weakened further, and in the second quarter we're facing additional demand and yield pressure, mainly from Brazil. We're taking steps to mitigate this impact by reducing capacity in Brazil, and reducing capacity growth for the year.

Our team continues to deliver world-class operational performance, and in spite of this downturn in the economies of Latin America, we're confident in our business model and on our team's ability to deliver another year of solid results, and remain very optimistic about the future.

Now I'll turn it over to Jose, who will go over our financial results for the first quarter in more detail.

Thank you, Pedro. And good morning, everyone. Thanks again for joining us. I also want to congratulate our entire team for their efforts on the solid quarter, and want to particularly highlight our discipline in controlling our costs. It's key to maintaining our Company's strong financial position.

During the quarter revenues decreased 11.5% to $632 million. We grew available seat miles by 8% year over year, yet revenue passenger miles [decreased] 6% year over year, as we saw weaker demand for air travel during the quarter, particularly in Brazil. As a result, consolidated load factor came in at 76.3%, a 1.8 percentage point decrease over Q1 2014.

Furthermore, passenger yields were 13% lower year over year, and adjusted for an increase of almost 9% in length of haul, mainly driven by the yield decrease in the Venezuelan market.

However on the expense side, first quarter operating expenses decreased 6% year over year, and our cost per available seat mile decreased 13% to $0.093 from $0.0107 in Q1 2014. And lower CASM was driven by a 29% reduction in fuel unit cost, due to 27% lower jet fuel prices, and a 3% improvement in Mexican CASM, which came in at $0.063, mainly from lower sales-related expenses and lower overhead expenses.

In terms of operating earnings, consolidated operating earnings for the first quarter came in at $127.3 million, translating to an operating margin of 20.1%, down year over year versus an operating margin of 24.8% in the first quarter of 2014.

In the first quarter we also generated a non-operating net income of $0.8 million, mainly consisting of $1.3 million in net interest expense, a $3.3 million foreign exchange translation and transactional loss, and a $7.1 million fuel hedge mark-to-market gain.

So in terms of net results, net earnings for the quarter came in at $113.3 million, or earnings per share of $2.57, compared to last year's first quarter net income of $151.4 million or $3.41 per share.

However, excluding the fuel hedged mark-to-market gain of $7.1 million, underlying net income for the quarter came in at $106 million, or earnings per share of $2.41, a 31% year-over-year decline compared to last year's first quarter underlying net income of $153.6 million, or adjusted earnings per share of $3.46.

With respect to fuel hedges, we ended the first quarter with hedges for 32% of our volume. For full year 2015, our hedge positions remain unchanged. We are hedged for 27% of our projected volume, mainly using jet fuel swaps at an average [per-gallon] price of $2.74 per gallon. For 2016 we have approximately 21% covered, using jet fuel swaps an average price of $2.52 per gallon.

Turning to the balance sheet, we continue to strengthen the position of the Company, as assets reached almost $4.1 billion at the end of the quarter, or an increase of about $50 million versus the end of 2014.

Owner's equity totaled approximately $2.1 billion. Debt plus capitalized leases totaled $2 billion. And our adjusted net-debt-to-EBITDA ratio, excluding cash in Venezuela, came in at 1.8 times, which continues to be the lowest in our peer group, and one of the best in the industry.

In terms of debt, we closed the quarter with approximately $1.1 billion of bank debt, about 57% of which is fixed rate, with a blended rate including fixed and floating rate debt of approximately 2.6%.

Looking at cash, short and long-term investments, we closed the quarter with $1.16 billion, which represents approximately 44% of the last 12 months revenues. However as of the end of the quarter, $471 million of our cash was in Venezuela, pending repatriation.

Excluding all the cash in Venezuela, the Company ended the quarter with almost $700 million in cash, which represents roughly 26% of the last 12 months revenues.

Regarding Venezuela, we continue selling only in dollars, and our bolivar exposure continues to decrease at a rate of about $5 million per month. As of April 30, 2015, our bolivar balance pending repatriation in Venezuela stood at $467 million, down from $485 million at the end of last year.

In terms of fleet, during the quarter we received one of our nine scheduled 737-800 deliveries, and returned one 737-700, which was coming off lease. So we ended the quarter with a fleet of 98 aircraft, 55 737-800s, 17 737-700s, and 26 Embraer 190s.

In addition to the one 737 delivery in the first quarter, we took delivery of another one in April. We have one more delivery in the second quarter, and then two in the third quarter, four in the fourth quarter. Additionally, we will return four more leased aircraft, one 737-700 during the second quarter, one Embraer 190 during the third quarter, and two Embraer 190s during the fourth quarter.

We will sublease two Boeing 737-700s for a five-year period starting in the second quarter. And we are evaluating alternatives for reducing two more of our aircraft in the third quarter. Ultimately we expect to end the year with a fleet of 98 aircraft with an average age of approximately six years. As you can see, we're making the necessary adjustments to capacity, while improving the overall cost efficiency of our fleet.

It is also important to mention that we have already secured our financing needs for the six owned 737-800s we're taking delivery of this year via Japanese operating leases with call option (inaudible).

Finally, as per Company policy, on June 15, we were issue our dividend corresponding to the second quarter in the amount of $0.84 per share to shareholders of record as of May 29, 2015.

So going back to our results and to recap, demand for travel in our region continues to be affected by lower economic growth and devalued currencies in Latin America. Use will be affected further in the second quarter, mainly due to weakness in the Brazil market, as well as the year-over-year effect in Venezuela.

We continue looking for efficiency in order to reduce our unit cost, and are receiving significant benefit from lower fuel prices. And we have one of the strongest balance sheets in the industry.

In terms of our guidance for 2015, due to fuel prices, the economic outlook in the region and demand trends, we're updating our 2015 full-year guidance as follows.

We're lowering our capacity growth in terms of ASMs, plus or minus 6%. Load factor is expected to come in lower, at plus or minus 75%. We're lowering our RASM guidance to plus or minus $0.114, based on our near-term forecast. We're lowering our CASM ex-fuel guidance to plus or minus $0.065. We're maintaining our fuel price assumption for the year at an effective price per gallon including inter-plane and net of hedges of approximately $2.45. And with respect to our operating margin, we're lowering our guidance to a range of 14% to 16%.

Thank you. And with that, we will open the call for some questions, followed by closing remarks from Pedro.

(Operator Instructions) Michael Linenberg, Deutsche Bank

(Inaudible) here. Given the 20.1% margin you produced in the March quarter and your revised full year operating margin guidance, it appears that you're expecting margins to degrade pretty significantly from here. And a lot of that was based on your lower RASM guidance. I was wondering if that RASM guidance is based on kind of the current booking trends you're seeing so far in the second quarter, or if that's just you guys getting more conservative around macro and FX trends.

Hi. So this is Jose here. So this is basically based on our Q2 visibility that we have. Second quarter is the lowest season of the year for us, and we expect unit revenues during the second quarter to be much lower than they were during the first quarter.

Now for the second half of the year, it's too early to tell still. But we're guiding to flattish load factor and [CRASM] versus the first quarter.

Okay, great. And then just one other one. It was reported that some members of Copa management recently went to Venezuela to speak to the financial authorities there. Did anything come out of that regarding the repatriation of your cash trapped there, or a potential deal to maybe work on getting that back? Just any update you could give us that would be great.

In reality, talks are ongoing. We indeed, the government of Panama made a visit there and we were part of it. But there is really no update. We don't really expect any payments in the short term from the Venezuelan government.

Okay, great. Thanks for all the help.

Helane Becker, Cowen

Great. Thanks very much, Operator. Hi, guys. Thanks for taking the time. Just a couple of questions with respect to fuel. I'm kind of surprised that your fuel cost is so high, given the current spot market price is under $2. So I was wondering if you could kind of talk about your forecast for fuel. And then as part of that, I was kind of wondering what you're paying right now for jet fuel.

So Helane, this is Jose again here. The forecast that we put out for the year, it's based upon the actuals that we've seen during the first quarter and up until now, up to the month of April, and where we see the curve for the rest of the year. And when you compare that to where the actuals had been back in February, and where it occurred was back in February. We see that there's no real-- any significant difference between the two moments when we have issued the guidance.

So we feel pretty confident that the numbers that we have there kind of reflect the curves as we see them today.

Okay. And then can you say just what price you're currently paying for jet fuel.

So the spot today, remember that first of all we have 30% hedged in the $2 range. So the spot today is at $1.67 in terms of jet fuel. So that's the (inaudible).

Yes. So that's why I'm kind of surprised you're using such a high number for jet fuel, because it just seems like the price that you're paying or your hedge is, plus the current price, you shouldn't be quite as high. That's my question.

Yes. So first of all the curve is really upward trending still. So that's one thing that's important. And by the way, [I want to make sure you understand] the [spot price]. I just rechecked the figure and it's at $1.94 as of May 4th. So that's basically where the number is. So it is a little higher-- it's been coming up over the last couple of weeks.

Got you. Okay. And then just on what you're seeing in Latin-- in South America and so on. Is it over-capacity-- has too much capacity gone into the market and people aren't being aggressive enough in adjusting capacity? Or it's that demand is just very, very weak and you cannot stimulate it with lower fares?

Helane, this is Pedro.

Hi, Pedro.

You know-- a second-- hi, Helane. What we've seen and especially starting early March, because January and February were actually pretty good months. And demand was close to normal. What we saw in early March was a greater devaluation of the Brazil real and other currency. But Brazil, its currency has been devaluating throughout the last 12 months. But it accelerated in March. It's gotten to a point where it's about 30% it devaluated versus a year ago.

But also that comes with economic forecasts that have been lowered to actually negative territory. So we're looking at an economy that's in a recession, and a currency that [greatly] devaluation, and demand has been impacted almost immediately. So we are expecting or hoping for demand in Brazil to recuperate towards the third and fourth quarter. And the third quarter is a high-season quarter in Brazil. But the second quarter is low seasoned, combined with devaluation, and the economy. We've just seen a drastic drop in demand.

And actually if we look at Brazil BSP sales, travel agency industry sales for the second quarter, what we've seen so far points to a decrease in the neighborhood of 30%.

Okay. Thanks-- I'm sorry--

No. I'm saying other markets are soft, but Brazil by far is where we're seeing the biggest impact.

And what percent of your capacity is in Brazil?

Around 20%.

Okay. And with the adjustments later this year, will that decline?

Yes. So it's Jose here. So in terms of ASMs, that's in terms of ASMs is 20% for the first half. But the second half with the adjustments it will come down to about 17%.

Okay. All right. Thank you. I'll get--

And we're taking out-- we're taking out most of the growth we put in for Brazil in the second half of last year. And we'll bring it back when we see demand strengthening again. So we'll go with demand. We don't have a set date for that capacity to go back in the market.

Okay. Thank you.

Bernardo Velez, GBM

Good morning, guys. Thanks for taking the time. I think I understand your thoughts on capacity expectations for 2015 as to a weaker environment in the region, especially in Brazil. But could you give us some more color on what are you expecting for the coming years? And I'm specifically referring to your four aircraft decrease in your fleet plan that was revealed on your Annual Report.

Well, this is Jose, Bernardo here. So for 2016, I think we can give you a directional figure on ASM growth. We'll be in the mid-single digits. And as to unit revenues for next year, it's a little too early to tell. I think that we should expect a recovery in the region. And so that should drive higher margins for 2015. So I'm not sure I caught the last part of your question.

But we will end up the fleet this year at 98 aircraft. So we'll have nine deliveries that are coming up throughout the year, and there are going to be nine aircraft returns, both from operating leases that are being returned and also we're performing some sublease of some owned aircraft.

Okay. Yes. That was perfect. And I mean I know you guys don't disclose any yield or performance by market. But could you comment on how did passenger yields or revenues per ASM behave [at Venezuela] during the quarter?

One second. Let us look for that information to be a little bit more precise. This is Pedro. Right so in my words, in my script, I mentioned that yield was down during Q1 by 16%, more or less. Some of that, around 4 percentage points, were due to length of haul, and increased length of haul in the quarter. And then the difference was mostly Venezuela.

The rest of South America had a small impact, maybe 2 percentage points. But Venezuela was most of the-- after length of haul, Venezuela was most of the difference in that first quarter. In the second quarter, it's probably going to be different. Because we're seeing then a South American, mainly Brazil is going to have an impact, which will probably be similar to what we're seeing from Venezuela.

And remember Venezuela is a tough comp in the first and second quarter. It will be less of a factor the third and fourth quarters.

Okay, perfect. Thanks again for your help, guys.

Hunter Keay, Wolfe Research

Thank you very much. And good morning, everybody. Jose, hey so I want to just flush out a little more follow-up on the first question. Obviously you came into the year expecting a certain set of underlying assumptions in terms of what to expect from demand and currencies. And then you cited the change in what you saw in 1Q, and then the booking curve in 2Q as a reason for the lower guidance.

But did you also lower your expectations for the back half of the year too? We know you don't know what bookings are going to do. But you obviously have made some underlying baseline assumptions on things like currency and GDP growth to support that guide. So when you lowered the full-year guide based on what you're seeing on 2Q, did you lower the underlying fundamental assumptions for the back half of the year? Or are you still assuming the same thing in the back half of the year that you assumed three months ago?

We lowered the back half of the year slightly, given what we're seeing in the second quarter. But most of the-- of I would say, the driver of the adjustment that we have made has been due to what we're seeing from the second quarter, how it's coming in.

So as I mentioned earlier, it's again too early to tell. But from what we're seeing for the second half of the year, what we're guiding to is flattish unit revenues versus Q1 on a unit basis.

And Hunter, this is Pedro. In a normal year the second half is much stronger than the first half of the year. But we still have to wait and see if it's going to come in that way. But we're still expecting the second half to behave at least kind of following the-- what has been the experience in past years.

I got you. Yes. I guess I was asking more about what you're expecting-- not so much from your booking patterns, but some of the underlying economic assumptions. So are you expecting-- because you made a comment I think Jose, I think it was Jose, you said that you expect 2016 to be better. I mean why would you expect that, other than it's just been a really long time of just bad, and maybe just comps alone? So again, when you're thinking about the recovery in the back half of the year, you're not thinking about some sort of to be clear here, like hockey-stick shaped recovery, but rather more of like a bottoming in 2Q and a gradual improvement as we move through the year? Is that fair? Again, saying nothing of your bookings, right?

Hi. This is Pedro. So that is fair. I mean we're maybe expecting a dip in Q2, and then Q3 and Q4 which will be the strongest half of the year, to get back to a level closer to Q1. That's what's embedded in our guidance. And that also takes into the account the capacity adjustments we've made in Brazil. So hopefully those adjustments will also yield benefits.

Okay. Thank you very much. And one last quick one. Can you remind us of what your point of sale is in Brazil for the 20% of capacity? And on the point of sale that is in Brazil, how do you price that? Do you try to peg fares to the US dollar, or do you just price it in reais to whatever the demand will support? Thanks a lot.

So international first, they're always pegged to the US dollar. But when there's less demand, when it's more expensive to travel, there's less demand. Then yields tend to be pressured down. It's also a result of that plus competitor actions, et cetera, including ourselves of course. But we price in dollars, always.

And point of sale Brazil, it's a little bit above 15% for total sales or revenues.

Thanks everybody. Okay. Thank you.

Duane Pfennigwerth, Evercore ISI

Hey guys. Thanks for the time. Just on your footprint of capacity to Venezuela specifically, and I'm sorry if you mentioned it in the prepared remarks. But can you just maybe walk us through how that footprint has changed, maybe the year-to-year change in the fourth quarter or the first quarter and the second quarter. And I don't know if you can give us any more detail on sort of the RASM decline that you're seeing there, or maybe RASM stability, not necessarily on a year-to-year change obviously, because capacity is down, but RASM stability in Venezuela post your switch to all USD sales.

Okay. So let me address as much as I can, and then Jose will back me up. So in terms of capacity to Venezuela today, our Venezuela capacity is around 2% of ASMs. And that's about 20% less than what we had at the beginning of 2014. And that comes mostly from capacity we took out from Colombia to Venezuela, which never came back.

Capacity between Panama and Venezuela was never cut back that much, and the little we cut back, which was one daily flight, we've since put back. So capacity between Venezuela-- and actually we down-gauged capacity aircraft back then in 2014. We went back to our normal gauge which are 737-800s.

So between Panama and Venezuela, we pretty much have the same capacity we had a year ago. We took out some capacity from Colombia, and that's equivalent to 20% less year over year. Do you want to address yield, Jose?

Yes. So in terms of yields, I would say that yields are down about 55% year over year versus Q1 last year. The important thing here to mention, as I discussed earlier, we were selling in dollars. And that's kind of driven by this. The flights are doing reasonably well.

As we've mentioned in our calls, there's a native market between Panama and Venezuela. So for now we're tracking these flights very closely. But for now, the flights are performing reasonably well.

And just to give you a little bit more color, Venezuela currently represents, the [old lease] associated with Venezuela represents about 6% to 7% of our total revenues.

And that's one piece. So that's total. And obviously the ASM number I gave you is only Panama/Venezuela. So it's hard to compare those two figures. It's not apples to apples.

Of course there a portion-- the majority of the passengers on the Venezuelan market still connect beyond Panama.

Okay. That's great detail. And then just going back to that kind of stability question. As you've seen sort of the moderation in your outlook from the last call to this call, I assume that that's sort of excluding Venezuela. So in other words, you've made this transition to 100% USD sales. And now that you have that transition kind of underway for a while, are you seeing yield stability in Venezuela? Or are you seeing an incremental deterioration there as well?

I would say that we've had a slight deterioration in our dollar yield in Venezuela, but nothing of major concern. Probably kind of the normal evolution of that market that went from very high bolivar fares to high dollar fares, to more normal dollar fares, and also a result of the currency that has continued to devaluate. So people have to find dollars somehow and the local devaluation affects that.

But again, it's been like a normal evolution. It's where we would have expected it. The levels are very healthy. So-- but still. Still it's a hard-to-predict market I must say, with a number of issues. But right now, it's doing as expected.

The big change I would say in overall in our projections, in our guidance, I mean in general has been what has happened in March, in particular, with the South American economies and Brazil, specifically speaking. So that almost came out of nowhere. And that was kind of like-- Brazil was like an inverse hockey stick in a way. Because it really weakened in March beyond expectations.

And for that same reason, we're also hoping that the waters will settle, and I don't know how long it will take to go back to normal, but we're expecting that it will do better the second half of the year.

Okay. Thank you. And then just on the hedges, and again, I apologize if you've disclosed this. But can you give us the percentages and the strike prices, not just for this year, but also into 2016?

Okay. Give me a second here while I get the information. So 2016 we had 21% of the volume for next year hedged at $2.52. And that figure for 2015 for the remaining part of the year is 27% for the total volume. So that's basically for the remaining part of 2015. And the strike price there is $2.74. These [are all our] fuel swaps.

Very clear. Thanks for the time.

Tom Kim, Goldman Sachs

Thanks for your time. I wanted to ask about the timing of the order with Boeing. Now look, I'm in favor of companies investing counter-cyclically. But I guess I am curious about the timing of this decision, just given that there are still uncertainties around the macro. I mean we're all hopeful that the macro turns in the second half of the year or next year. But to me, it seems really uncertain, at best. And the momentum certainly doesn't look great. And so I'm just curious about how you thought about the timing. And again, I certainly recognize you've got to run this business for the long term. But to me it was just very curious, so if you could please elaborate that would be helpful. Thanks.

Yes. Actually we love the timing of the order. We think it's great timing. And also it sends a few, I think, important messages with that order. One of course is optimism about the future and about our business model, which remains as strong and valid as ever. And also optimism on our capacity to strengthen even more the airline and take advantage of the opportunity that will come in the future.

But I should also say that these new MAX aircraft are going to make us more efficient, more cost-competitive. So these aircraft are going to be much better for our bottom line. And we had the flexibility to either grow or replace older aircraft. So we've always been very careful, in a way conservative, in how we make our decisions.

We never jump without a good parachute. So the way this order is scheduled is that we could actually replace either leased aircraft or older owned aircraft, depending on demand. And again, growth could be flat, or it could be as much as we want it to be. But each one of those aircraft is going to make our bottom line better.

So no matter what the demand environment is from 2018 and onwards, we will be better off, once we start getting the MAX aircraft.

Okay. I mean that's certainly helpful. I appreciate the color around the ability to potentially replace leased aircraft and the older fleet.

You mentioned something about the fuel savings. What was the jet fuel price baked in that you mentioned, the 14%.

The 14% in on gallons. It's 14% less gallons.

Okay, not-- okay, all right. Got it. Thank you. That's certainly very helpful. And I guess just with regard to a further question on capital allocation. What are your thoughts on the dividend payout ratio? Obviously you raised it not too long ago. I'm just wondering. Just given these macro uncertainties, would you consider reducing the payout and maybe preserving more cash? Or do you feel comfortable, given that your operating cash flows are still very strong of sustaining that 40% payout?

Right. So right now, I can talk about today how we see things right now, how we see the future. There are no plans and no need to reduce the payout. We have a very, very strong cash position, even without the cash in Venezuela. We are projecting to build on that cash position throughout the year. We only financed aircraft that are delivered and engines. So in terms of liquidity, again, we're very strong. We see no need of reducing, and there are no plans to reduce that dividend or that cash payout for the rest of the year.

Great. Thank you very much.

Savi Syth

Good morning. Just on the-- a couple of small questions here. On the Venezuela demand that you're seeing today, given that you're selling in US dollars, is it fair to assume that the purchasing power reflects more kind of the [scenario] of black market rates, and not necessarily this kind of higher rate that airlines can exchange if they need to, or theoretically can exchange?

Sorry. This is Jose here. We haven't really necessarily tied back the exchange rates on an ongoing basis. But the way that I think we look at it is that on a dollar basis, the market is still performing and reacting well to the capacity that has deployed there. So our load factors are holding up for now very well and the flights are profitable, as we were profitable-- those flights are probably still above average of the rest of the network.

The issue of course is that the yields have been coming down. And even on a year-to-year comparison when the yields are down 55% versus prior years, the reality is that they're still very healthy yields in the market.

I guess what I'm trying to get at is the passengers that are buying your tickets, they would be exchanging the bolivars at the weaker rate, right? Not kind of the 12 kind of bolivar per dollar rate. Is that fair?

This is Pedro, Savi. So we don't really know. But that could be a fair assumption. But I'm sure that that could be a fair assumption. But we don't really know who's paying for the ticket or they're purchased outside of Venezuela.

I mean it's still hard to predict a (inaudible) situation. And it's still subject to changes. So it's really hard to pinpoint exactly what's happening, or what's going to happen tomorrow. But maybe your assumption is the right one.

Got it. Thanks. And then just on bookings into the seasonally strong period. I know it's still early. But I'm guessing kind of in the second half, June, things starts to tick up. What's the early indication? Are you seeing that maybe outside of Brazil or everywhere? Are you seeing the kind of normal seasonal pick-up coming?

I would say that slowly. The judge is still out. We've got to get closer to the date.

Okay. It's far out. Okay. And then just my last question. I was wondering if you could just talk about competitive actions. One from just kind of the larger carriers that have a hub-and-spoke model, and if you're seeing anything different from them.

And then I know you're starting to see some carriers like Aeromexico and Volaris starting to add kind of routes to kind of Central, and then maybe even South America. I wonder what the potential impact of that could be on kind of Copa's demand.

So there has been-- I would say that a competitor's actions, additional capacity, has not been irrational in the last, let's say, 12 months. But it has been probably somewhat faster or greater than what we had seen maybe in the previous 24 months. So there's been a little bit more activity in terms of more flights into our region, or between regions, North America, Caribbean, and Mexico, South America, and North America, et cetera. There are different markets and different regions and they're all behaving slightly different.

But overall, I would say that there's been a little bit more activity, nothing really irrational. However, when we combine that with a slowing economy with currency devaluations and weaker demand, then obviously that doesn't make things better. So we're being responsible and we're adjusting capacity.

Some of the US carriers have also announced adjustments of capacity to Brazil. And I'm sure other airlines are also going to adjust in different markets. But we still don't know.

Okay. That's very helpful. Thanks, guys.

Bob McAdoo, Imperial Capital

Yes. Hi, guys. I'm trying to think about what you just said about Brazil and Venezuela and whatever. Before we get into that though, briefly, travelers to and from Venezuela, are they people who are more or less originating in Venezuela? Or are these people who are business people and whatever from the rest of the world who are having trouble getting to Venezuela, and therefore now use you more than they used to? Is that a reasonable assessment of what's going on?

No. There's a very, very strong Venezuelan community in Panama. It's been growing for the past 7-8 years. So that's kind of a strong base for our business. Then there are Venezuelans in Central America. There's also people that travel to the Caribbean on vacation.

I mean Venezuela is still, with all its difficulties, I mean it's still a normal country in many aspects. And people travel for a number of reasons, to visit family, to do business, to go on vacation. So our traffic is pretty much the same traffic we've always had. It hasn't really changed much, with the exception that there is more traffic now, much more traffic now between Venezuela and Panama, than what we had before. But it's really a mix of everything.

Okay. And then the second piece, I was trying this morning to try to figure out what you were doing with capacity in Brazil and Venezuela, based on some of the comments that have been made and whatever. And looking at what's out there in the systems today, it's really kind of confusing. In Brazil it looks like you're down some in June. But you've actually still got more capacity in July to Brazil. Then August it's back down about 10%. And in Venezuela, in June, July and August it's up 25-40% in terms of number of seats per week.

And I'm just trying to understand what is really-- that doesn't sound like what you're trying to tell us. I'm trying to figure out what's going on.

Let me explain. It is what I told you guys. But so we're reducing capacity in Brazil for the second half, but not necessarily. July, it's a high season month in Brazil. So we're reducing less capacity in July, than what we're going to reduce in August and beyond.

So if you want to look at real Brazil capacity reductions, look at September. Look at October. And there you will what is the real reduction. But in July we're not reducing as much, because July is usually a strong month. So if you look at it month by month, it might be confusing. But if you look from September on, you will get a clearer picture.

So we try to also adjust capacity, depending on the seasons. And in low season, we are always going to fly less to any market. There's that possibility.

In terms of Venezuela to Panama, as I mentioned in the call, our capacity is the same we had before the crisis. Because we cut one flight, which we put back. And then we up-gauged from the Embraers to the 737-800s. So we have the same capacity.

Where we've cut down our capacity is from Colombia to Venezuela where we went from three dailies to one daily flight.

So when I look at it versus August this year versus August last year, it looks like it's up like 50% or 60% into Venezuela versus last year in total. Is that correct?

I would have to do the math. I haven't done the math for the month. But we went from between Panama and Venezuela this is, between Panama and Venezuela we went from four to five flights a day. And in gauge, we went from 100-seat aircrafts to 160-seat aircrafts. So yes. So your number could be correct.

I think directionally speaking, it kind of seems right, yes.

Your number is correct. But it's mostly gauge though. It's mostly gauge more than flight. And the 737-800 is a much more efficient aircraft than the Embraer 190. So even with lower load factors, we do better with the 800.

Okay. Thank you.

Dan McKenzie, Buckingham Research

My question ties to the longer-term outlook for the business. And I guess investors today are essentially dismissing 18% to 20% operating margins going forward. And that seems correct. So the question becomes, how should we think about the new normal? And based on what you said already this morning, it seems like it is something higher than the 14% to 16% operating margin this year.

But it seems like we've also had some permanent changes in Latin America that make it perhaps more challenged than we've seen historically. I'm just wondering if you can help us think about the business with regard to the longer term.

And one moment.

Hello?

Steve Trent

Hi. Thank you very much for taking my questions, guys. Just one or two from me as a follow-up. In terms of the capacity reduction to Brazil, any color as to whether this reduction is going to impact your [code share] with Gol?

Hello? Hello? Hello?

Steve, are you there? Are you listening to us?

Yes, can you hear me?

Yes, we can hear you well. Did you hear my answer?

No. I apologize the sound went completely blank. Could I trouble you to-- on my line-- can I trouble you to repeat the answer?

Yes. No problem. It was a quick question. I just said, no. It would have no effect. We're adjusting capacity to demand, to how we're seeing demand right now. We still have significant service to Brazil. We cover eight cities. And it should not affect our relationship with Gol.

Okay. That's perfect. That's perfect, and just one other quick follow-up, I guess kind of as a follow-up to Savi's question. And I apologize. There was interference. So I didn't totally hear the answer to this either.

But with respect to Central America competition, you've got the likes of Volaris indicating that it's going to launch some flights to the region. You've got VivaColombia perhaps somewhat more active now in Panama. And just wondering what you're seeing from a competitive standpoint on that side of the fence.

Our main competition actually comes from the bigger carriers growing their hubs into some of the same markets we serve from Panama. However, our hub of the [American in Panama] is still around twice the size in terms of destinations and frequencies that the hubs we competed against. And as I was mentioning before, a competition in general has increased capacity in the last 12 months above what we saw maybe in the previous 24 or 36 months, but still rational. We haven't seen anything that is irrational or unexpected.

So thing right now more important is the slowdown in the economies of the region. Because of the economies we're doing the same as a year ago. There will be enough for all. So that's why we're adjusting capacity in Brazil. And we're making greater low season adjustments in other markets to make sure we're right, our capacity is right for the demand. But we still have the strongest hub, a very, very unique network, with many unique destinations. And there's nothing out there that's been a material change to the competitive balance in our region.

Okay. Great. That's very helpful. I will let someone else ask a question. Thanks, Pedro.

And our last question comes from the line of Dan McKenzie from Buckingham Research.

Good morning. Thanks, guys. I'm wondering if you can talk about how your thoughts and the need for beginning to [un-bundle] the product, and just [ancillary] revenues in general is evolving. And if so, how do we think about the timeframe and potential materiality here?

Dan, can you restate the question? We got a bad connection. Sorry for the technical difficulties here. For some reason we're not getting you very clearly.

Okay. Sorry. I'm just wondering if you can talk about how your thoughts and the need for un-bundling the product is or has evolved. And if it has, just sort of how you're thinking about the timeframe and potential materiality here.

There's nothing we can comment on right now. It's obviously something that we're looking at. But I would say there are no changes, no material changes right now at this moment. And we do not expect any material changes for the rest of the year. And we don't have anything we can comment about beyond this year. But it's obviously something we are looking at of course.

Understood. And then I guess my next question just ties to the longer-term outlook for the business and the Boeing aircraft order I guess for that purpose. And I guess the question becomes how should we think about the new normal here? Based on what you've said, it seems like it should be something higher than 14% to 16% operating margins. But then again, we've had some permanent changes in Latin America that make the region perhaps a little bit more challenging.

And I'm wondering if you can just help us think about the business longer term.

Well I would say the economic changes in Latin America should not be permanent. Both Boeing and Airbus still project that air traffic within Latin America will be the second-fastest growing region in the world for the next 20 years. So we're still very optimistic about the future of air travel in Latin America, and again, particularly within Latin America.

Our aircraft order, as we have mentioned before, is going to make us much more cost effective and efficient. And we can grow as much as we need to, or replace as many aircraft as we shall decide with the new aircraft order. So the MAX order is just going to make us better. It's going to help our margins.

And once Latin America starts growing again, which hopefully will be in the near future, whatever that means, we'll be in an even better position to continue delivering very strong results. So we're very optimistic. We're very bullish. But of course right now the region is going through a much tougher time than what we have seen before. How long is it going to last? We don't really know. But we think that it will gradually recuperate.

Thanks for the time, guys.

Thank you. And at this time, I would like to turn the call back to Pedro Heilbron for closing remarks.

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

I would also like to mention that we are holding our Annual Investor Day for sell-side analysts and institutional investors in Panama on May 28th. For more information, please visit our Investor Relations website in copa.com. Or contact Rafael Arias.

We hope to see you here, and have a great day. And have a great weekend. Thank you.

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