Copa Holdings SA (CPA) 2015 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Copa Holdings second-quarter earnings call. (Operator Instructions) As a reminder, this call is being webcast and recorded on August 13, 2015.

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

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

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

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

In addition, our discussion will contain forward-looking statements not limited to historical fact 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 second-quarter earnings call.

As you know, our financial results came in softer than the market expected, mostly as a result of the weaker demand environment, particularly in the month of June. Considering the soft demand environment, we continue to be proactive in making adjustments to our network, continue to focus on controlling costs and delivering a superior product.

At the same time, we remain confident in the long-term strength of our business model and our competitive advantages. So we fully expect to come out ahead of this economic cycle at an even stronger earnings.

Among the key points for the quarter, revenues were significantly impacted, coming in 20% lower year over year. In fact, our unit revenues decreased 24% year over year, driven by a 4-percentage-point drop in load factor and a 20% reduction in yields.

At the same time, we achieved lower unit costs as CASM decreased 15% from $0.107 to $0.091, and our CASM ex-fuel came in 6% lower at $0.062. This led to an operating margin of 9% for the quarter.

On July 1, we successfully launched ConnectMiles, our new loyalty program. We delivered on-time performance of 90% during the quarter, among the best in the industry. In fact, Copa earnings was recently recognized by Strike Threat for best on-time performance and slight completion in Latin America for the first half of 2015.

We are very proud to receive this recognition, as this is one of our key operational KPIs. And the Copa team worked hard day in and day out to ensure that our passengers consistently arrived to their destinations on time.

The second quarter has historically been our weakest quarter in the year in terms of revenue performance. However, our current forecast suggests that the second half of the year will come in weaker than originally anticipated and not too different from the second quarter in terms of RASM.

These weaker expected results come after the economies of Latin America, particularly in South America, still don't show signs of recovery. And currencies have devaluated further against the US dollar, affecting overall demand for air travel both in business and leisure markets. Currently, the main markets affected are Venezuela, Brazil and, to a lesser extent, Columbia.

In Venezuela, yields were down significantly year over year. First, from the dollarization of sales that began in the second half of last year. And on top of that, in June we saw demand weakness, driven primarily by further economic deterioration.

Brazil's revenue weakness mainly comes from further economic slowdown and currency devaluation. We reduced capacity in this market by 18% as of June when compared to January of 2015, which was our peak month in terms of capacity to Brazil. Despite that, we still saw a material year-over-year drop in load factor and yields in June.

Columbia demand hasn't been affected as much, as load factors remain similar to last year. However, yields are down significantly due to a currency devaluation above 35% and some additional competitive capacity.

Even though the economy has slowed down from 5% growth last year, it is still expected to grow approximately 3% this year. So Columbia is less affected than Venezuela and Brazil.

Passengers originating in these three markets represented almost 40% of our O&D revenues, down from approximately 50% last year during the same period. And it appears that the economic slowdown and currency weakness described will persist throughout the third quarter and potentially for the rest of the year.

In terms of our overall advanced bookings for the third quarter, we see load factor trends flat to slightly downwards in the prior year, which is obviously much better than the 4-point drop in Q2, but with yields slightly lower quarter over quarter. We also see continuing pricing pressure as competitors try to capture traffic in a softer demand environment. For this reason, we have reduced our unit revenue guidance for 2015 from $0.114 cents to $0.105.

Given that this affected (inaudible) passengers to fly from other markets, we continue to review our network in order to optimize profitability. We have made some capacity reductions in specific markets and are now expecting 2015 capacity growth of approximately 5%. Nevertheless, we will be in a position to add back some of the capacity once markets improve again.

Regarding new destinations, we continue to look for opportunities to expand and strengthen our network and hub, serving unique markets that lack connectivity to our region. We have already launched New Orleans, and also this month we launched Puebla and Villahermosa, our fifth and sixth destinations in Mexico.

Furthermore, we announced a new daily flight to San Francisco beginning in September and two weekly frequencies to Belize beginning in December. The additions of San Francisco and Belize were possible due to the redeployment of capacity from Brazil and other markets.

In terms of fleet, this year we have 9 deliveries, all new Boeing 737-800s. Specifically during the second quarter, we received two new 800s, returned one leased 700 and subleased one 700 to United. We subleased an additional 737-700 to United in July. For the remainder of the year, we expect to receive 6 more 737-800s and return 3 Embraer 190s with expiring leases.

Turning now to our new loyalty program, we successfully launched ConnectMiles on July 1. Early consumer response has been very positive, as we have surpassed initial expectations for enrollment and member adoption. ConnectMiles provides Copa powerful tools to strengthen our customer relationships, improve customer service, and extends special benefits and recognition to our most frequent flyers.

Because of our membership in Star Alliance, our ConnectMiles members will continue to have earnings and redemption access to the world. We are very excited about the beginning of our own loyalty program and is well on the way to realizing the revenue potential it would bring to our Company in the midterm.

So to summarize, we are not pleased by our second-quarter financial results. The recent economic environment has weakened further during the second quarter, and we expect additional demand and yield pressure during the second half of the year mainly from Venezuela, Brazil and Colombia. We are taking the necessary commercial actions to mitigate this impact and are fine tuning capacity in our markets while at the same time optimizing and strengthening our networks.

Our team continues to deliver world-class operational performance while achieving leading unit costs. And in spite of the downturn in the economies of Latin America, we are confident in our business model. We have the strongest network for travel within the Americas. We continue reducing our unit cost, and we have a solid liquidity position with low leverage, which will allow us to come out an even stronger airline in the future.

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

Thank you, Pedro, and good morning, everyone. Thanks again for joining us. I want to highlight us in our last quarter our team's discipline in controlling costs, which is particularly important in an environment of slower demand and key to maintaining our Company's strong financial position.

During the quarter, revenues decreased 20% year over year to $538 million. We grew available seat miles by 6%, yet revenue passenger miles were essentially flat year over year as we saw weaker demand for air travel during the quarter, especially during June. As a result, consolidated load factor came in at 72.9%, 4.3 percentage point decrease over Q2 2014.

Furthermore, passenger yields, even when adjusted for length of haul, were 20% lower year over year, mainly driven by yield decreases in Venezuela, Brazil and Colombia markets.

However, on a positive note, our second-quarter operating expenses decreased 10% year over year and our cost per available seat mile decreased 15%, $0.091 from $0.107 in the second quarter of 2014. The lower CASM was driven in part by 27% lower jet fuel prices.

Additionally, we continue to improve our unit cost performance on an ex-fuel basis. For the quarter we reduced our CASM ex-fuel by 6% to come in at $0.062. This was driven by reductions in our maintenance, passenger servicing and overhead unit costs as well as lower sales-related expenses.

For the second half of the year, we expect to have a slightly higher ex-fuel CASM given timing of certain expenses as well as the expenses related to our new frequent-flier program.

However, as you can see, the delivery of our product with low unit costs continues to be one of our Company's core strengths.

In terms of operating results, consolidated operating earnings for the quarter came in at $49.2 million, (inaudible) and operating margin of 9.1%, down substantially when compared to the 19.5% achieved in the second quarter of 2014.

In terms of net results, net earnings for the quarter came in at $64.1 million, or earnings per share of $1.46, compared to last year's second-quarter net income of $118.2 million, or $2.66 per share.

And excluding extraordinary items, namely the fuel hedge mark-to-market gain of $23.4 million, underlying net income for the quarter came in at $41 million, or earnings per share of $0.93. 64% year-over-year reduction compared to last year's second-quarter underlying net income $115.9 million, or adjusted earnings per share of $2.61.

With respect to fuel hedges, we ended the second quarter with hedges of 30% of our fuel volume. For full-year 2015, we are hedged for 28% of our projected volume using jet fuel swaps at an average equivalent price of $2.70 per gallon.

We closed the quarter with approximately 21% covered for 2016 using jet fuel swaps at an average price of $2.52 per gallon.

Turning to the balance sheet, assets reached almost $4.2 billion at the end of the quarter. Owners' equity totaled approximately $2.2 billion. Debt plus capitalized leases totaled $2 billion, and our adjusted net debt to OIBDA ratio, excluding all of our cash in Venezuela, came in at 2 times, which continues to be the lowest in our peer group.

In terms of debt, we closed the quarter with approximately $1.2 billion in bank debt, about 61% of which is fixed rate with the 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 $1.15 billion, which represents approximately 46% of last 12 months' revenues. However, as of the end of the quarter, $452 million of our cash was in Venezuela pending repatriation. Excluding all the cash in Venezuela, the Company ended the quarter with over $700 million of cash, which represents roughly 28% of last 12 months' revenues.

Regarding Venezuela, we continue selling only in dollars, and I believe our exposure continues to decrease. As of July 31, 2015, our (inaudible) balance pending repatriation in Venezuela stood at $448 million, down from $485 million at the end of last year.

In terms of fleet, we ended the quarter with fleet of 98 aircraft -- 57 737-800s; 15 737-700s; 26 Canberra 190s.

Year to date, we have already taken delivery of 3 new Boeing 737-800s. We returned 2 leased 737-700s, sub-leased 2 737-700s to United airlines. For the remainder of the year, we expect to receive 2 new Boeing 737-800s during the third quarter and 4 during the fourth quarter. Additionally, we will return one Embraer 190 leased aircraft during the third quarter and 2 during the fourth quarter. We are expected to end the year with a fleet of 100 aircraft with an average age of approximately six years. So you can see, we continue modernizing our fleet to improve our product and overall cost efficiency.

Finally, as per Company policy, on September 15 we will pay our third-quarter dividend in the amount of $0.84 per share to shareholders of record as of August 31, 2015.

So going back to our results and to recap, demand for air travel in our region continues to weaken, affected by low economic growth and further devalued currencies in Latin America. Yields will continue to be affected during the third quarter as we are seeing weakened demand mainly in Venezuela, Brazil and, to a lesser extent, Colombia.

We continue looking for efficiencies in order to reduce our unit costs. We are receiving significant benefits from lower fuel prices, and we continue having one of the strongest balance sheets in the industry.

In terms of our guidance for full-year 2015, given fuel prices, the economic outlook in the region, further devaluation of currencies and demand trends, we are updating our 2015 full-year guidance as follows. We are lowering our capacity growth in terms of ASNs to plus or minus 5%. Load factor is still expected to come in at plus or minus 75%. We are lowering our RASM guidance to plus or minus $0.105 based on our near-term forecasts. We are maintaining our CASM ex-fuel guidance of plus or minus $0.065. We are lowering our fuel price assumption for the year to an effective price per gallon of $2.20, including inter-plane and net of hedges. And with respect to our operating margin, we are lowering our guidance to arrange of 11% to 13%.

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

(Operator Instructions) Hunter Keay, Wolfe Research.

Do you b- so the question on the underlying assumptions that are embedded in the guide. When we think about the fourth quarter and even into 2016, can you let us know -- obviously no one knows where GDP is going to go or currencies are going to go, but what is underlying your assumptions in terms of your planning process? Because I believe at your analyst today, Pedro, you had said you expect Latin American GDP growth to rebound from about 50 bips this year to about 2% next year. Are you guys assuming the stabilization in currency the back half of this year -- are you assuming those GDP growth rates sort of recover as you plan, say, beyond the booking curve?

This is Pedro. Right now, we're forecasting and obviously can bet in our guidance, the second half of this year. And it's based mostly on what we saw in the second quarter and more than anything what we saw in June. Because up to June, the quarter was looking much better. June came in really weak, weaker than what we were expecting. Even the way we were revenue managing for June was for a stronger June, but late bookings did not come in. And in general, the economies and the currencies weakened.

So that's had a big influence in how we are forecasting the rest of the year, even though we do not have good visibility yet for the fourth quarter for September somewhat. But we still have to wait for late bookings in September and the rest of the quarter.

Next year, it's too early to tell. In November, we'll be giving preliminary guidance for 2016. But more than anything, what we need is stable currency and stable economy. It's not as smart that we need growth to rebound to what it used to be a year or two years ago. We have stability. If there is less uncertainty on what's going to happen with the currencies and the economy, unit revenues could start recuperating.

Okay. So you're -- I'm not asking you to categorize your guidance as conservative. Your guiding, we think you're going to do it. But you are and what I'm hearing you say is that your guide for the RASM does include an assumption that the demand environment continues to get worse. Is that a true statement?

Yes, it is flattish to slightly low. So slightly low to flattish in Q3, flattish in Q4. So it does include kind of what we've seen in the second quarter and in June, and it's not like we take Q4 back to normal or close to normal. We're using what we saw in June and what we're forecasting for the third quarter. We're almost in September, so we have pretty good visibility for the third quarter. And we're expecting fourth quarter to remain flattish versus what we're doing -- what we're seeing right now.

For 2016, we have not come out with a guidance yet. And again, if the economy stabilized at the currency reached their point and stayed there, we would expect unit revenues to improve next year. But we are not there yet.

I got you. Okay. Thank you. And then one quick follow-up -- not really a follow-up, unrelated. If there is a sense that -- you guys obviously believe in the long-term story. You reiterated it at your analyst day, you reiterated at the prepared remarks today. Pedro in your market caps is based within halves. You have an extremely robust balance sheet, very low leverage ratios. If there is a sense that your stock has stopped going down and we've been pricing in the worst of it, why not just take the entire thing out and LBO the Company if you feel like the stock has bottomed here and things are not going to get worse?

Well, you never know. I won't speculate about that, but that's all stuff we need to consider.

Okay. Thank you.

Helene Becker, Cowen.

I just have a couple of questions. Can you say how many unencumbered aircraft you have at this juncture? And are there opportunities for additional capacity growth from these levels?

Helane, this is Jose here. We have right now 9 unencumbered aircraft, and I think we'll end up the year with 12 unencumbered aircraft.

Okay. And are there opportunities (technical difficulty) capacity?

You broke down. Can you (multiple speakers) grow capacity. Yes. We have a lot of flexibility in the fleet plan. We can -- the way that we're seeing -- as you saw this year, we are cutting back on our growth what we are guiding from 6 to 5. And we expect 2016 to be kind of in that same ballpark. But we have still some flexibility in terms of expiring leases and with these unencumbered aircraft that we could play around with on the margin for more anything 2016.

Okay. And then just two other questions. You mentioned that the business started to decline in June. And then we saw the July load factor, which actually was a little bit better than your third-quarter guidance would imply. So can you say if the business deteriorated further in July and August, then? Or was it up a little bit in July and just deteriorated again in August?

Helane, this is Pedro. So obviously the business was already weak in the quarter but not as weak as June. June was by far the weakest month in the second quarter.

In July, which is one of our peak months in the year, we see traffic getting back to an -- let's say an acceptable level. But in part it was because we were already kind of alerted that by June that was not as strong as expected. So July did better in terms of load factor but with yields depressed like we saw in the quarter.

So we got a load factor, but we paid a price in yields, not much difference to what we saw in the second quarter. June would have had load factors, better load factors, if we had known ahead of time that late bookings were not going to come in as strong as we expected. So maybe we would have been a little bit more aggressive. So in short, load factors recuperated somewhat in July, but yields remained depressed.

Okay. What about in August? What are you seeing in August? Same thing as July?

Yes, very similar. Very, very similar to July.

Correct.

Okay. And then these hedge losses, is that going to continue in the second half of the year, Jose?

Yes, I think our hedges for the rest of the year are b- they seem to be out of the money. We have basically maintained our hedge position for 2015 flat over the last several months. So I think there are going to be realized hedge losses in this for the second half of the year, you're seeing.

Okay. Well, thanks for the time, guys.

No problem, Helane. Thanks a lot.

Duane Pfennigwerth, Evercore ISI.

Sorry to just follow up on the near-term here, but it sounds like you're saying July yields are similar to June and similar to what you saw in the second quarter, but 2Q is a seasonal trough. So can you talk about how much yields are typically higher in July versus what you typically see in a June quarter? Because I guess that implies if you're not seeing any yield improvement that things are actually deteriorating in July even though -- anyway, any color you can offer on that would be great.

Okay. Let me see if we can get you more precise information.

Or I guess the year-to-year RASM -- I don't know if you'd be willing to give the year-to-year RASM in June and what that looks like in July.

Yes, let us look for that.

Yes, so, Duane, this is Jose here.

And just while you're looking for that, maybe you could just remind me about CapEx.

When you look at -- on a unit revenue basis, if you look at the b- as a Q3 2015 versus 2014, there is a drop, but I think that is a lower drop than what you saw on a year-over-year comp in Q2 on a unit revenue basis. There's still going to be a double-digit reduction in RASM on a system basis in Q3 from what we're seeing. And I think that RASM on an overall basis is going to be relatively flat to Q2. But the kind of the trough versus Q2 2015 and 2014 is actually wider than what we're seeing in Q3 of 2015 versus 2014.

Say that again (laughter).

So lower gap on a year-over-year comp in Q3 2015 versus 2014 vis-a-vis the gap that we saw -- the negative gap that we saw in Q2 2015 versus 2014. So there seems to be a lower gap on a year-over-year comp in Q3, even though the overall -- on an overall basis, you're still seeing a reduction on double-digit terms. So it's slightly better on a year-over-year comp.

Okay. With respect to Venezuela, can you help us understand -- and I understand these are small numbers. But if Venezuela was cited as one of the sources of weakness in the second quarter, why then is capacity growing year to year in the third quarter? And maybe along those lines, it could suggest that while Venezuela yields are very, very weak, they're still better than system average. But maybe you can help us understand that.

Right. This is Pedro. So first, there's obviously capacity is planned months ahead. It's not something we plan for one month to the other. And Venezuela yields are down first because of the transition to all dollar sales that happen in the second half of last year, and 100% starting early this year. So that was kind of the beginning of the Venezuela yields dropping. We saw some of that in the first quarter.

What then happened, especially in June, is that Venezuela demand weakened quite a bit. So load factors came down and yields came down further in Venezuela. The capacity plan for the third quarter was already planned for.

And what we see right now is we see loads recuperating, maybe not to the levels we saw at the beginning of the year, but stronger than in the second quarter. And yields, although still down, are enough for the flights to be profitable. So now the profitability in Venezuela kind of normal is not above average. But we can fly at capacity, which is no more than going back to the capacity we had before between Panama and Venezuela. Not between Panama and Colombia -b between Venezuela and Colombia where we will remain down. But capacity was pulled back in similar to the levels we had before between Venezuela and Panama.

And to summarize, even though it's not as profitable as before and yields are further down, it's still profitable and similar to average, and it makes sense to fly that capacity.

But nevertheless, Duane, we are very keen on making any necessary adjustments to our capacity, and we do that on an ongoing basis.

Okay, I'll jump back in the queue. Thank you.

Bernardo Velez, GBM.

I was wondering if you guys could share with us how much of your yields and demand softness was caused by (inaudible) in Brazil.

This is Pedro. Let me look for Brazil numbers. Brazil is -- we have -b I'm looking for Brazil as a percent of ASM. One second. Brazil is -- Brazil will be -- in the second quarter, Brazil was almost 19% of our ASM. By the third quarter it will be down to close to 16%, but it was close to 19% of ASM. And it was in the second quarter around 16% of total revenues, of which most were point-of-sale Brazil.

Okay. And should we assume that most of your passenger traffic in the Brazilian market comes especially in the corporate segment?

Well, we have a combination, and we have quite a bit of leisure traffic. But in general terms, maybe answering your question in a simpler way, around 20% to 25% of our revenue weakness in the second quarter was due to Brazil.

Okay, that's perfect. Thanks a lot, Pedro.

You're welcome.

Savi Syth, Raymond James.

Just to extrapolate a little bit on what Bernardo was asking, could you please provide that level of color? I'm trying to understand what the pressures were from Brazil, Venezuela, Colombia and maybe a mix of that. And then, which of those is getting worse in 3Q versus what you saw in maybe June of the second quarter?

Okay, so Venezuela was around 20% of the weakness, and it's not getting better in Q3. Brazil, as I just said, was around 20% to 25% of the weakness. And it is improving in Q3 slightly, but is improving something somewhat. And Colombia was also around 20%, and it is improving in Q3.

Got it. And Venezuela, I think, is in August a seasonally strong period and it's still not strengthening into August?

Sorry, can you ask that again?

Yes, Venezuela is strengthening in August. I'd say that we are seeing certainly a stronger performance in Venezuela than compared, let's say, to June. But it is certainly not where it was on a year-over-year comp. It's way down in terms of unit revenues on a year-over-year basis. But there is a slight improvement, I think, versus Q2 performance.

Okay. And then maybe taking a step back, I was wondering if you could -b the last time we saw this level of kind of economic weakness and currency weakness was clearly 2009. And I was wondering if you could maybe contrast what's different about the environment today than in 2009 when we saw similar levels of pressure. Because it seems like the earnings are definitely under more pressure than it was in 2009 when you adjusted for the size of the Company.

Yes, we did not see as much weakness in 2009. We did not have the currency devaluation that we have seen right now, which are in some cases up to 30% and 35%. But we did not see that in 2009. There was some uncertainty in 2009, but the economies were still growing. I don't have all the figures on my mind right now, but the economies were still growing. And actually 2010, 2011 were strong growth years for most of the economies in Latin America.

So I think it's -- in that sense, it's quite different. Plus, there's been more capacity growth overall from airlines from Latin America, the US, et cetera, in the last, let's say, 12 to 24 months in many markets, which would be fine if the economies were growing and the currencies were strong. But when that changes, then there is kind of a land grab. Everybody wants to make up for slower growth, and yields start dropping more than what would usually happen. So I think it's a combination of all of that. But again, Latin America did fine in 2010, 2011, et cetera.

That's helpful. And then I may ask one last question, I was wondering if you look at it on a constant currency basis, I was just wondering what level of the unit revenue declines and maybe what contribution the non-fuel costs had from lower currency?

I think from a cost side, it's been -b it's helped, but it's really been minor because of the fact that we have a large portion of our costs are here in Panama, and they're dollarized. And I would say that if you look at kind of a yield performance, at least in the second quarter, you see that it's basically down 20% year over year. So you would argue that that's not unlike what's going on in some of these major currencies that have been devalued up to now.

Got it. That's helpful. All right. Thank you.

Mike Linenberg, Deutsche Bank.

Just a couple here. Just back to -- not to beat a dead horse here on the currency and the impact of RASM, but, look, your PRASM was down 25% year over year. It looks like the stage length was up a little bit, so maybe that's a couple of percentage points there. What b- do you have a sense on percentage points what was the function of currency weakness, what was FX driven? And/or anything related to fuel surcharges because we have seen those come down in a lot of markets as well. Do you have that breakout?

I think it's b- you know, it's -- a high percent is the changes in Venezuela, which were, I don't know, deeper, if you want to say that, than what was expected or projected. And so for different reasons, but it just has become a different market. It's still profitable, but it's a very, very different market than even what we had in the first quarter. We only sell in dollars but at much lower yields. And that's because the -- your black-market currency and their economy has further weakened. And that's been the way to capture traffic in a much-changed business environment. So Venezuela has had considerable drops in PRASM.

Then Brazil, Brazil was economy and devaluation of the currency. So between Venezuela and Brazil, we can get to 80% of the revenue weakness. And then we talked a little bit about Colombia and some of the others make up the difference. But you know, it's basically that. I don't know if that answers your question, Mike.

Okay, that's helpful. Then just back to, Joe, it looks like on the salary and wage expense line, you did call out the FX team maybe actually mitigating salary and wage expense. And I'm curious, of all of your crews -- flight attendants and pilots -- are they all domiciled in Panama, or do you still have flight attendants that are domiciled in Columbia that will allow you to get the benefit of the stronger dollar? As well as what percentage of your employees overall are based outside of Panama?

Mike, we do have crews in Columbia still. Technical crews, pilots and flight attendants. So there is yet a little bit of a benefit there in terms of the currency devaluations in that line. And in terms of the number of employees that we have in Panama versus outside, I'd say in Panama, it's well about 4,500 employees. So about half of the total are in Panama. But, yes, it's about two-thirds here in Panama and one-third in Colombia and in the rest of the country.

Okay, that's helpful. And then just one quick last one on your fleet, Joe -- or Jose, I'm sorry. Jose, you did mention that you had least one airplane to United, a 737-700, and then subsequent to quarter end another one went to United. How many airplanes do you have with United and are there plans to release more, sublease more? And sort of the second part to that question, you have been re-delivering 190s. I'm not sure if I heard you correctly -- is the 190 fleet now starting to shrink? And are the airplanes that are going back, are they the single-class 190s that were used in the Colombian domestic market?

We have right now 2 737-700s at United under a sublease contract, and those are the only two that we have right now scheduled to be under that scheme.

The Embraer fleet, basically we will right now have 26 Embraer 190s. And at the end of the year, we will have 23. So will return 3 Embraer aircraft or lease operating leases that are expiring, and the 3 aircraft are in the Copa Colombia configuration of 106.

Okay. Very good. Thank you.

Marcio Prado, Goldman Sachs.

Just would like to discuss a little bit more detail the jet fuel costs. We see some slight decrease quarter over quarter, second Q versus first Q, even with oil price higher when compared to first Q. So if you just could give some more information on given that we are heading already in the middle of the third quarter on what to expect short term with regard to jet fuel costs. And also on your hedging policy. Thank you.

So the way that we see the average in the quarter or actually Q2, we saw it lower than -- basically it was flattish versus Q1, about 2% lower than Q1. Not that significant. So the (inaudible) item there is -- part of it is also related to on an overall basis we see a fuel line on a quarter-over-quarter basis. Some of that is also driven by the number of number of ASMs that you're flying. So there's little bit of price impact and there is also somewhat there in terms of how much you are flying.

And in terms of hedges, we are at 30% hedged for the remainder of the year, about 28% for the remainder of the year. And those hedges are at around $2.70 a gallon. So they are out of money essentially.

So, yes, it's a little bit lower; it's about, I want to say, $2.60 a gallon for the rest of the year on an average price in terms of value hedges. And it's about, again, 20% b- no, actually, end of the year 25%. So about a quarter of our volume for the remainder of the year at $2.60 on average.

Renato Salomone, Itau BBA.

Looking at forward seat availability, besides adjusting capacity in Brazil, you seem to be cutting capacity in markets like Las Vegas by a big chunk. This has been a key leisure destination for Brazilians. So I'd like to understand if this adjustment is a reflection of weak demand from Brazil or it's a specific problem in that market. My concern here is not so much Las Vegas but whether Brazil has been hurting your performance north of the hub as well.

Yes, definitely. Brazil and any other week market affects our performance beyond the hub in Panama. So we need to make adjustments that reflect those new demand trends throughout our network. So we feel that with a single Las Vegas daily frequency, we can satisfy the need of the Brazilian market as we see it today and have better performance, better profitability performance.

In the future, we'll be ready to add capacity at back-capacity in any market we've had to reduce once things come back closer to normal. And we are also making a low season, and actually we are making a specific adjustment in different flights especially where we have multiple frequencies throughout the year. So in low season, we'll make more reductions than in high season. But we are looking at demand trends, and there might be a market where we cut a few frequencies in September. Maybe we add them back in October or vice versa. So we're looking at that also.

I have a quick follow-up to comments you made about Venezuela. Do you attribute the renewed weakness in this market mainly to the macro environment in the black market FX rate like you mentioned peaking in that (inaudible) and somewhat hurting your US dollar sales? Or local carriers adding capacity and selling, and (inaudible) also played a role there?

Yes, as I say, all of the above. So the macroeconomic environment, it has a strong effect. But yet, you also have local carriers that can sell in bolivars. We cannot because we will not get our dollars to take them out of the country, so it makes no sense for us to sell in bolivars. But local carriers are selling in bolivars and are taking a big chunk of the local traffic thanks to that advantage. So, yes, those things are impacting demand.

Dan McKenzie, Buckingham Research

Pedro, I'm wondering if you can elaborate a little further on the changes you're making with respect to the networks to drive better results. And I appreciate the new routes, but Copa's network footprint looks different in the back half of the year relative to the second quarter, which causes me to think maybe the guidance could be conservative, to the point of an earlier question. But let's just set that aside. How do you get comfortable that the cuts made to Brazil are adequate or perhaps to some of the other countries that you're making?

So it's something we do based on our demand projections. So we do it every month; we review what we are doing X number of months into the future. And it's very dynamic. It's changing. So it would be a market where we cut back a month, a certain month, and it goes -b comes back on the following month. We might have some low-season cuts that we're not going to see during high season. And it's really hard to predict, for example, what we will do in the first half or first quarter of 2016. It's too early. We know what we are doing from here until the end of the year. And it's mostly specific cuts or reductions to specific [OMDs] and mostly temporary except for some reductions in Brazil. Which, for example, we took out our third frequency to Rio. That remains out even in the first half of next year and that won't come back on until we see significant changes in the demand trends for Brazil.

Same with the previous question about our second Las Vegas frequency. So that's not temporary; that's permanent. We feel we have enough capacity with a single frequency to Vegas. But when that strengthens again when connectivity from Brazil strengthens again, we can put back the capacity.

And some of the reductions -- as we mentioned in the script, some of the Brazil reductions we're using to add capacity, a new unique market where we see an opportunity.

So, again, it's very dynamic. It depends on demand forecasts. And you know, we do monthly, but we can only do it so many months in the future. I'm not sure if that answers the question.

No, that's helpful. Thanks. I guess just the second question here, as you think about the goal post on how you're managing the Company, I wonder if you can talk about how you think about return on invested capital. It's been double digits every year since the IPO, and the track record falls to high single digits this year and next. And we understand the reasons, but it does impact how investors think longer-term as they value Copa stocks. So to the extent obviously you're willing to defend the double-digit return on invested capital more aggressively would naturally drive a very different valuation conclusion.

So I'm just wondering maybe you can just talk more at a high level more philosophically how you're thinking about that particular metric.

Well, we, Dan, are obviously very keen on returning value to the shareholder, and we're looking at this very closely.

At the same time, we want to manage a business for the long term. And we in this industry pride ourselves on having a very strong balance sheet so that we can continue moving forward. But certainly those are items that are very important to us in terms of the way that we return value to our shareholder, and that's something certainly we're looking at day in and day out.

Okay. Thanks, guys; appreciate it.

Stephen Trent, Citi.

This is actually Kevin Kaznica stepping in for Stephen. Thanks for taking our questions. Just to kind of change the tack a little bit, we were wondering about the status of the Tocumen airport expansion. Do you still expect this to be done by the end of next year?

No; that's going to be delayed most likely until the end of 2017. And it's actually all for the good because at the time, it was originally done by the previous administration had a lot of issues that have been corrected or mostly underway to being corrected right now. So construction has started -- restarted, I think, at full speed. But it will take, I guess, a few years -- two years to complete. It's going to be end of 2017, but we're going to end up with a much better airport, and a much better airport in terms of remaining the leading intra-America hub in our region.

Okay, great. Then I guess to follow up on that, do you see any -- do you have any comments on low-cost carriers launching service to or in Central America? I've been hearing rumors.

Yes, there's been a lot of rumors, and there is some activity in that sense. And you know, we'll wait and see what happens. In markets in our region, especially within Central America, most of the markets are not huge, are not that large and not easily stimulated. It's kind of we all fly to the same airport for the same costs.

And we are very -- at least Copa is an extremely competitive airline. Even from a cost standpoint, we are full-service, all-inclusive. Our fares are bundled. It includes baggage and everything. But when you look at our unit costs, if we were to segregate our economy cabin, we are going to be in the $0.05-plus territory. We're going to be below the $0.06 CASM in our economy cabin with a great reputation, great on-time performance, many frequencies.

So it's not an easy competitive landscape we have, and we are one of the reasons why it is that way. No low-hanging fruit. But, yes, there is activity, and we'll see what happens.

No, that's great to see that you guys are still confident on your competitive advantage there.

And then just finally, this is completely (inaudible), but we are hearing some -- I guess some news about some droughts in South America, Central America that's affecting throughput, I think, at the Panama Canal, and maybe the drop in Brazil as well. And we know it's not directly related to you guys, but have you heard of anything on kind of economic impact with respect to lower throughput of cargo boats through the canal?

El Nino, as we know it, it's affecting our region. The last time that happened, I think it was 15 years ago, and the Panama Canal actually had to limit the draft of the ships going through due to the lower water levels at our main lake that are part of the Panama Canal system. And they're talking that that might be necessary again maybe next month, maybe in September or October. We don't think it will have a huge impact in the economy or in our business, but it is something that the government is dealing with right now.

So it's not something that's actually being implemented now; it's just something being considered if water levels remain depressed.

Correct.

Okay, great. Thank you very much.

Hunter Keay, Wolfe Research

Thanks for taking the follow-up. As we think about 2016 capacity -- but let's assume for a second -- I think you said it is early, but let's assume for a second things continue to get worse or not get better. How much flexibility do you have on growth? Would you be willing to shrink? The plan is to still grow the fleet next year. How much would you be willing and how much would you be able to flex capacity down in the event that the demand environment continues to be poor?

Our plan right now is not to grow the fleet next year; it's to keep it flat from where we would end at the end of 2015. That's the plan right now. If the economies get better, if currencies stabilize, which could well happen, we can renew lease planes and grow by 2, 3, 4, 5 aircraft. It depends on how we see things.

On the other hand, if things were to get worse, which hopefully that won't happen and it's not what we're seeing right now, we can always get rid of more. We could for example sublease more 700s to United. So we also have flexibility in that direction. So we think we're in a good position to adjust to the realities of 2016.

Okay. And again, if the fleet -- again, if the things you said gets worse, Pedro -- but if things sort of stay the same, as we're seeing in June, July and August, presumably that growth rate would have to come down from flat fleet. That still is embedded in that a little bit of a recovery. Is that fair?

Not really. If things stay flattish next year, we will stay as we are right now, which is kind of how we're going to close the year.

You might expect a low single-digit ASM growth rate for 2016 if that were to occur. But as Pedro mentioned, we have, we believe, a lot of flexibility in the fleet plan still even a year out to work it and pursue opportunities if they show up or adjust downwards if it's necessary.

Okay. Thanks again for the time.

Duane Pfennigwerth, Evercore ISI.

Thanks for taking the follow-up. Just one quick one on the mileage plan. Is there any temporary headwind that you're experiencing now as it relates to sort of launching your own mileage plan and ramp time? Is there any revenue impact that you are experiencing right now related to this transition?

Not really, Duane, not from the revenue side. What we will see in the second half is a -- and I think we've mentioned before -- is about a $20 million incremental cost associated with the start-up of the program. And so that's actually into our unit cost guidance for the year.

Thanks. And then just can you remind us gross CapEx for this year and next year? And how much of your deliveries do you have left to still finance?

All of the aircraft for this year, we have 6 aircraft left to be delivered this year, of which 3 are operating leases. And those 3 airplanes that we have pending for delivery this year, they've already been secured the financing via Japanese operating leases. And on a total basis, our CapEx for the year, including aircraft, is around almost $300 million, about $288 million.

But the aircraft are basically 100% financing because of the structure that we have. So kind of other CapEx, non-aircraft CapEx is about $100 million.

What is that in 2016? Thanks.

Yes, in 2016, it's around the same figure. On a total basis, including aircraft, around $220 million.

Thank you.

Savi Syth, Raymond James.

Just a few quick questions; one is on the ConnectMiles. Are you still expecting a positive revenue contribution in 2016? And any additional thoughts now that you've seen a little bit more of the program ramp up?

And secondly, just on the capacity front, I would imagine that you and your competitors coming into the year, maybe you were a little bit more hesitant to adjust capacity because I don't think we saw the level of weakness as being where it was. Are you seeing any investments on the competitive front where you're seeing more cuts now versus before? Or are things about the same?

This is Pedro. I'll start with the second question, and then I'll let (technical difficulty) talk about -b answer the first one. We have not seen that much in terms of capacity, a reduction, especially in the markets that we have talked about as being the weakest. We haven't seen that much. Hopefully we'll see some more capacity adjustments the rest of the year. But so far, no, we have not really seen a lot of reduction. I mean, there has been some here and there, but nothing significant.

Got it.

In terms of the SSB, I'd say that initially are very pleased by the way that the program has been ramping up. But it's still too early to tell in terms of what the impact will be next year in terms of revenue, positive side. It might be something for, probably -- I want to call it second half of 2016 is when we will start seeing true benefits of the program.

But for now, we're very pleased with the way that the program has started. We're pretty pleased with that.

And I'm showing no further questions at this time. I would like to turn the conference back over to Mr. Pedro Heilbron for any closing comments.

Thank you. Okay, thank you, all. This concludes our second-quarter earnings call. Before we leave, I just want to emphasize that we at Copa Holdings have the strongest network in Latin America. We have the best unit costs, the best product. And we are dedicating 100%-plus of our time to make sure we come ahead of this market and economic weakness, that we come out ahead an even stronger airline. And we are fully confident in our business model, in our opportunities in the future and also confident that we can make the best part of this little bit more challenging situation.

So with that, I want to thank you for being with us and thank you for your continued support. Have a good day.

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