Copa Holdings SA (CPA) 2015 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to Copa Holdings' fourth-quarter and full-year earnings call.

(Operator Instructions).

As a reminder, this call is being webcast and recorded on February 18, 2016.

Now I would like to turn the conference call over to Rafael Arias, Director of Investor Relations.

Sir, you may begin.

Thank you very much, Carmen, and welcome, everyone, to our fourth-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 fourth-quarter and full-year highlights, followed by Jose, who will disclose our financial results.

Immediately after, we will open up the call for questions from analysts.

Copa Holdings' fourth-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 fourth-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 would like to turn the call over to our CEO, Pedro Heilbron.

Thank you, Rafa.

Good morning to all and thank you for participating in our fourth-quarter and full-year 2015 earnings call.

As always, I want to congratulate our coworkers for their efforts in what was possibly the most challenging year for Latin America and for Copa in the last decade, as the region is going through an economic contraction and currencies have devaluated significantly against the US dollar, exerting considerable pressure on yields.

So while at still very healthy levels, our 2015 margins came in much lower than in recent years.

I want to assure you we are working hard and doing everything under our control to restore our historical margins by means of new revenue and cost-reduction initiatives and through proactively making adjustments to our fleet and network in an effort to improve unit revenues.

Fortunately, the core strength of our business model remain intact as we continue delivering our product consistently and maintaining our customers' loyalty, which will come a long way once we are past this very weak economic cycle.

In fact, 2015 was one of our best years in terms of operational performance.

Just a few weeks ago, in recognition of our high operational standards and our on-time performance in 2015, FlightStats awarded Copa for the third year in a row as the best airline for Latin America.

Furthermore, according to OAG, Copa had the second best on-time performance of any airline in the world.

This would not have been possible without the hard work and dedication of our world-class team.

Among our main highlights for 2015, we reached an operating margin of 11.8% for the year in a difficult economic environment.

Revenues came in 17% lower year over year, driven by a 19% reduction in yields.

We achieved lower unit costs as CASM decreased 13% to $0.092 and CASM ex fuel decreased 3% to $0.064, the best unit cost of any full-service airline in the Americas.

We strengthened our network by adding six new destinations -- David in Panama, Puebla and Villahermosa in Mexico, New Orleans and San Francisco in the US, and Belize, closing the year with 73 destinations in 31 countries, by far the most extensive network in the region.

We announced the signing of an order for 61 Boeing 737 MAX 8 and MAX 9 aircraft, which will help keep Copa as a leader in terms of product and cost efficiency going forward.

We launched ConnectMiles, our new loyalty program, which is strengthening our relationship and value proposition to our customers.

During 2015, we took delivery of nine new 737-800s, [who are] returning five leased aircraft, and subleasing two of our 737-700s for a net growth of two aircraft, ending the year with a fleet of 100 aircraft.

We closed the year with 34 of our 737-800s equipped with Split Scimitar Winglets, which reduce fuel consumption versus regular winglets by almost 2%, maintaining our fleet as one of the youngest, most modern, and efficient in the region and the world.

On the operational front, our team delivered excellent numbers, with on-time performance coming in above 90% and a flight completion factor of 99.7%, placing us once again among the best and most reliable airlines in the industry.

So we continue delivering what our passengers expect from us, a superior network for intra-America travel with more choices, better schedules, and a world-class product.

Now turning to the main highlights for the fourth quarter, we delivered an operating margin of 7.3%.

Load factor came in lower year over year as passenger traffic increased 1.7% year over year on 2% capacity expansion.

Yields and unit revenues decreased 20% year over year.

However, on the cost front unit costs came in 12% lower, due to a lower fuel price year over year and a 2% improvement in CASM ex-fuel.

Turning now to 2016, we expect another challenging year in terms of demand.

Despite positive economic growth from most countries in the region, the IMS is forecasting a small regional GDP contraction, driven mainly by large contractions in Brazil and Venezuela.

One bright spot for the region and for Copa is Panama, our base country, as it should continue to outperform the region with estimated GDP growth of approximately 6%.

In the context of this difficult economic environment, we believe the most prudent strategy right now is to exercise capacity discipline.

As you know, last year we decided to defer several 2016 and 2017 aircraft deliveries.

As a result, we're now expecting only one new 737-800 delivery for this year and have two Embraer 190 lease expirations.

So on a net basis, we will decrease our fleet by one aircraft.

In fact, this year's incremental capacity will be mainly the full-year effect of larger gauge from aircraft added during 2015.

In terms of our capacity management initiatives for 2016, as of the beginning of the year we had already reduced 15% of capacity in Brazil on a year-over-year basis, and plan to further cut capacity by 13% as of March.

We have also been more thorough in terms of adjusting capacity to reflect demand seasonality in our markets and expect that to continue going forward.

Our 2016 network expansion plan will most likely include fewer new destinations than last year.

We have recently announced Holguin, our third city in Cuba, which will start in June.

Additional new destinations will be funded through capacity adjustments we are making along our network and they will provide unique feet to our hub as we continue to enhance Tocumen airport, the hub of the Americas, as the most complete and convenient connecting point in the region.

In addition to strengthening our network, we will continue implementing initiatives to improve our product and service, as well as generate efficiencies.

To name a few, we are planning to launch a cost reduction and revenue enhancement plan through a number of initiatives that will help us continue to reduce our unit costs and improve revenues going forward.

We will continue to develop ConnectMiles in order to enhance our service to our top customers, improve marketing and promotional capability, and grow ancillary opportunities.

Launch a new mobile app platform, as well as improvements to copa.com, in order to provide enhanced service to our customers and drive further direct sales.

Turning to our current demand environment, load factors are trending flat year over year during the first quarter of 2016.

However, yields are down significantly year over year, given the effect of currency devaluations experienced during last 12 months, as well as a softer economic environment.

Nevertheless, unit revenues in the first quarter are trending up quarter over quarter.

We are also encouraged by the increased number of transatlantic flights coming into Panama, as they will add important connections to our network.

On the cost side, fuel prices have dropped substantially since our last earnings call, which, combined with our CASM ex-fuel discipline, should provide positive momentum for earnings in spite of lower unit revenues.

So to recap, we believe the fundamentals of our business model remain intact and fourth-quarter results by no means represent a new normal for Copa.

We still operate in mostly underserved and small markets, which can only be served efficiently through a hub.

Our Panama airport has the best geographic location and infrastructure to serve the intra-Latin America market and accommodate our future growth.

We continue optimizing capacity to a current market demand environment and continue strengthening our network, the most complete network for intra-America travel.

We have competitive and improving unit costs, which will also benefit significantly from lower fuel prices.

We continue implementing the necessary initiatives to improve our passenger experience and the delivery of our world-class product.

And most importantly, we have a very committed and dedicated team who day in and day out run a very competitive and successful airline.

Despite a soft year in terms of economic expectations for Latin America, we are well positioned strategically, financially, and operationally to take advantage of future opportunities and continue working hard towards delivering world-class financial results.

With this, I will turn it over to Jose, who will go over our financial results.

Thank you, Pedro.

Good morning, everyone, and thank you for joining us.

First and foremost, as always, let me begin by joining Pedro in congratulating the entire team for its discipline in controlling our costs, which is key to maintaining our Company's strong financial position, particularly in a time of slower capacity growth.

During 2015, we grew capacity by approximately 4%, improved our ex-fuel unit cost by 3% for the year, and executed over half of our $250 million share repurchase program, which, combined with our quarterly dividend, continues to return great value to our shareholders.

Nonetheless, our 2015 profitability was affected by revenues which came in 17% lower year over year.

As we have mentioned before, the lower revenues were driven mainly by weaker economies and weaker currencies in Latin America, particularly in Venezuela, Brazil, and Colombia.

Reported net income for full-year 2015 came in at $185.4 million, which translates to earnings per share of $4.23 and an operating margin of 11.8%, down 48% and 7.4 percentage points, respectively, from last year.

When excluding special items, which include a fuel hedge mark-to-market loss of $21.6 million and impacts from devaluations of the Argentine peso for $6.9 million and the Venezuelan bolivar for $2.3 million, underlying net income came in at $216.2 million or adjusted earnings per share of $4.93.

Looking at the fourth quarter, we grew capacity by 2% year over year as we continue reducing capacity growth in order to mitigate the impact from the softer economic environment.

Revenue passenger miles increased only 2% year over year as we continued to see weaker demand for air travel during the quarter, which resulted in a consolidated load factor of 74.8%, a 0.3 percentage point decrease versus Q4 of 2014.

Furthermore, passenger yields came in 20% lower year over year, mainly from softer currencies, which, combined with the lower load factor, resulted in a revenue decrease of almost 19% to $533 million.

On the expense side, fourth-quarter operating expenses decreased to 10.7% year over year and our adjusted cost per available seat mile decreased over 12% to $0.09 from $0.103 in Q4 2014.

The lower CASM from the quarter was driven by 31% reduction in jet fuel prices and a 2% improvement in ex-fuel CASM, which came in at $0.065, mainly from lower sales-related expenses and a reduction in salaries and benefits, driven primarily by a reduction in our variable compensation.

As of today, fuel prices continue to be much lower than in the fourth quarter, and expectations are that they will remain low throughout 2016.

This could create additional pressure on yields, given that several economies in the region are dependent on commodities.

However, we believe that the benefit from lower fuel prices can be net positive for earnings.

In terms of operating earnings, consolidated operating earnings for the fourth quarter came in at $39.1 million, translating to an operating margin of 7.3%, down year over year versus an operating margin of 15.6% in the fourth quarter of 2014.

Looking at nonoperating income and expense, the fourth quarter generated a net nonoperating expense of $26.2 million, mainly consisting of a $25.3 million fuel hedge mark-to-market loss and a net interest expense of $0.8 million.

With respect to fuel hedges, our hedge positions remain unchanged since the end of the third quarter of 2015.

As of December 31, we had in place the following coverage.

For 2016, we had hedged 33% of our projected volume, 28% with jet fuel swaps at an average of $2.35 per gallon and 5% with a zero cost collar with a put option level near $1.50 per gallon.

For 2017, we had hedged 6% of our projected volume with jet fuel swaps at an average of $1.80 per gallon.

Turning to the balance sheet, we ended the year with a very strong financial position as assets reached nearly $4.2 billion for an increase of almost $80 million versus the end of 2014.

Owners' equity totaled approximately $2 billion.

[That] was capitalized leases to under $2.2 billion, and our adjusted net debt to EBITDA ratio excluding all the cash in Venezuela came in at 2.8 times, by far the lowest in our peer group.

In terms of debt, we closed the year with approximately $1.3 billion in bank debt, about 60% 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 year with over $1.1 billion, which represents approximately 49% of last 12 months' revenues.

However, as of the end of the year, almost $423 million of our cash was in Venezuela, pending repatriation.

Excluding all the cash in Venezuela, the Company had $684 million, which represents roughly 30% of last 12 months' revenues.

Regarding Venezuela, we haven't received any payments from the Venezuelan government in the last 15 months, and given the economic situation of the country, we don't expect significant payments in the foreseeable future.

That being said, we continue working diligently, hand in hand with the Panamanian government, in order to find a reasonable solution to this issue.

In the meantime, our bolivar exposure continues to decrease on a monthly basis as we still pay for certain expenses under local currency.

We do not sell in bolivars.

As of February 4, 2016, our bolivar balance pending repatriation in Venezuela stood at $418 million, down from $528 million back in June 2014.

Nevertheless, some airlines have recently written off all their cash in Venezuela.

We have not done so yet, but if the situation remains unchanged, we will have to declare a partial or total loss on the outstanding Venezuela cash balance.

Turning now to our fleet, for 2016 our current plan is to receive one owned 737-800 in June and return two aircraft with expiring leases during the third quarter for a net reduction of one aircraft for the year.

Finally, I am pleased to announce that our Board of Directors approved an amendment to our dividend policy, establishing the payment of our annual dividends on the basis of underlying financial results.

As a result, on March 16 we will pay our first quarterly dividend in the amount of $0.51 per share to shareholders of record as of March 3. It is important to mention that given this amendment to our policy, the dividend payouts will not be affected by any potential accounting loss related to the Venezuela cash balance.

So going back to our results and to summarize, demand for air travel in our region is likely to continue being softer in 2016.

Yields will be affected, especially in the first half of 2016, due to the macroeconomic environment in Latin America.

However, we continue to proactively manage fleet and capacity in our markets in an effort to improve unit revenues.

We also continue looking for efficiencies in order to reduce our unit costs and for the time being are receiving significant benefit from lower fuel prices.

We have a very strong balance sheet, even discounting all the cash in Venezuela, and we continue to return incremental value to our shareholders.

In terms of our guidance for 2016, as in past years, last November we provided preliminary guidance for the year ahead.

Given significantly lower fuel prices, the economic outlook in the region, and demand trends, we are updating our 2016 full-year guidance as follows.

We are maintaining our capacity growth in terms of ASMs at plus or minus 3%.

Load factor is still expected to come in at plus or minus 76%.

We are lowering our RASM guidance to plus or minus $0.098, based on lower yields due to a weaker regional economic outlook.

We are maintaining our CASM ex-fuel guidance of plus or minus $0.065.

We're lowering our fuel price assumption for the year to an effective price of a gallon, including inter-plane and net of hedges, of approximately $1.70, and with respect to our operating margin, we are raising our guidance to the 11% to 13% range.

Thank you, and with that, I will turn it over to Pedro for closing remarks.

Thank you, Jose.

Now we will open up the call for some questions.

(Operator Instructions).

Savi Syth, Raymond James.

I just wanted to -- if you could help us understand a little bit more on the yield side, just given that you are making adjustments on capacity and the seasonality of the capacity.

Has the yield decline stopped getting worse in what you are expecting in the first half as we go through from a yield pressure perspective, just the full-year impact of the pressures that we've seen, or is it -- is there further softening?

And I wonder if you can just elaborate a little bit between Brazil and Colombia just on a market basis.

Okay, so I will start and then Pedro maybe can jump in, Savi.

For the year, we feel that at least in the first half on a year-over-year comp basis, the first half you will see a unit revenue reduction, I think, in the mid-teens.

And our guidance has included basically a flat -- unit revenue guidance versus the second half of 2015.

So that's the way that we are seeing and that is how the $0.098 RASM unit revenue guidance is -- has included in it.

In terms of Brazil, we have made some reductions in capacity in Brazil.

I think on a year-over-year basis our capacity there is down almost 30%, and I see that -- but, however, Brazil is still suffering.

Brazil is still down in unit revenues, and our expectations during the first half and well over the double-digit range on a comparative basis.

Let us not forget that Brazil started actually feeling economics pressures, or at least from our perspective, during the latter part of the second quarter of 2015.

Right, so Savi, if we think of Brazil in this first quarter, quarter over quarter, yields are down around 5% quarter over quarter.

And obviously, they were significantly down last year, and especially in the fourth quarter on a year-over-year basis, which you know.

And then, we think of Colombia, which is another of the markets we have mentioned, as being affected.

Yields are flattish compared to the fourth quarter of last year.

That's very helpful.

Thank you.

So on the cost side, I wonder if you can elaborate a little bit, and then it seems like you are expecting year-over-year pressure.

Is that just from the slowing growth?

Or I would expect that some of the one-time startup cost that you had in 2015, lease return costs, would be going away.

And I wonder if currencies aren't strengthening.

I am just curious as to why you are expecting pressure year over year on that nonfuel cost?

Yes, there are a couple items there, Savi, as you mentioned.

First of all, return conditions still will be an item for 2016, given that we are continuing to return aircraft, and we feel that it will bring us about a $20 million incremental total cost in aircraft returns for the year versus 2015.

There are -- a full-year effect of the program of ConnectMiles still will -- we feel that it will hit CASM by over -- or unit cost -- or total cost by about $8 million, due to the full-year effect.

We feel that the currency devaluation effect essentially already was into the 2015 expenses, so there is not really a big full-year effect there.

And indeed there is lower growth for the year, so these costs were dilutive over less number of ASMs -- or a lesser number of ASM growth, I might say.

Helpful, all right.

I will get on queue.

Thank you.

Josh Milberg, Morgan Stanley.

Thanks very much for the call.

I had a question on the guided 3% capacity growth.

I understand that this growth is being driven largely by upgauged aircraft, but I was just hoping you could elaborate a bit further on the rationale for that number and why it wouldn't make sense to be keeping capacity flat or, in fact, cutting capacity, just given what has gone on with the macro environment and with FX rates.

Okay, Josh, yes, this is Pedro.

Our ASM growth for 2015 was 4.5%, more or less.

That is coming down to 3% in our guidance for 2016.

And as you will mentioned, it is pretty much all due to the replacement of Embraer 190s with Boeing 800s, which give us a much lower unit cost and some more profitable aircraft.

We have made significant capacity cuts in Brazil.

With what I've mentioned in the call right now with the cuts we are going to make now in March or accumulated to March, it is going to be around 28% from beginning of 2015, a 28% reduction in capacity in Brazil.

So we're reducing capacity where we have to.

We're also being a lot more thorough in -- during the low seasons in parking aircraft and also reducing capacity.

And if we see opportunity to do more of that, we will.

There are other markets that are doing okay, and even though they are not as strong as before, we don't have an opportunity in those markets to reduce capacity.

So it is what we think is best for the Company right now, but obviously we will react to demand as we see it in the coming months.

Yes, and if there are further moves that we need to make in terms of capacity, we will certainly go ahead and do them, as we have done so in the last 18 months.

That's great.

And can you give a little bit more color on how you have redirected the capacity out of Brazil into other markets?

Where you have moved that capacity?

Right, so some of the capacity we've -- for example, we opened San Francisco towards the end of last year -- but I should say that most of that capacity is not flying right now and it is waiting for a decision on are we going to open additional frequencies to other markets.

We have done a little bit of that, but not a lot.

And we may end up having maybe additional surplus aircraft before the end of the year, but we will deal with that when we get there.

Okay, thank you very much.

Hunter Keay, Wolfe Research.

So Pedro, last quarter you said that you guys were not building in a dramatic improvement in the underlying assumptions for the RASM guide.

But today, it looks like the cut to the RASM guide is based on really what seems to be really just more like a first-half revision and you're still assuming a pretty good recovery in the back half of next year.

So I guess the question is, does the new revenue guide assume now some underlying improvements in the back half of 2016 versus maybe not so much before?

And then in the event that is not the case, how should we think about maybe categorizing or framing the downside risk in the event that things get a little bit worse on the unit revenue front?

Okay, so the second half of the year has seasonally been our strongest half throughout the last -- a bunch of years.

Last year, 2015, the second half of the year was extremely weak, very, very weak and much weaker than the first half of the year.

So in paper, the comps this year are going to be -- they should be a little bit easier because we're coming off a very, very weak unit revenue wise second half in 2015.

However, even though that is the case, what we are guiding to has a unit revenue improvement in the second half over the second half of 2015 of less than 2%.

So it is tiny.

It is almost flattish, so we are -- and it is based basically in stable currencies and no more than that.

And throughout our history, Latin America has shown to be a very resilient market, and we think that once currency stabilize, yields should also stabilize.

But again, we are talking of a 1 point something improvement from a very, very weak second half of last year, so that's really nothing.

Hopefully, there isn't a lot of downside to that because we're not being very optimistic in our guidance.

I guess I understand the comp issue, Pedro, but I just -- my experience has taught me that comps are such a trap in this industry on RASM, and the only time RASM ever gets better is if ASMs come in a lot or prices go up, and I just -- it seemed like a really, really sharp V-shaped recovery and I guess it is hard for me to get there -- go ahead.

No, it is not a sharp V-shaped recovery.

We are saying that the second-half yields or unit revenues for 2016 are going to be flat with the second half of 2015.

And there have been capacity adjustments between the second half of 2015 and the second half of 2016, so some of the main markets, our most affected markets, like Brazil, have seen capacity adjustments from our side at least, significant capacity adjustments, 28% in the most affected market, which is Brazil.

And then the currencies, we're expecting them to stabilize, not to have the 30% devaluations or such that we experienced last year.

So with all of that, we are guiding to flat unit revenue.

So it is not a V-shaped recovery.

It is actually flat versus a very weak year before, and again, there have been a lot of initiatives that we have all taken to contribute to that flattish guidance.

Okay.

Last question, is the -- today's news about the bolivar devaluation, is that factored into the guide today?

I think that the reality is that the Venezuelan economy doesn't really -- has not really acted too much related to where the actual -- the formal or the official exchange rate bolivar has been at.

And we, a year ago, moved away from selling in the local currency and our sales are being made outside.

But we, of course, are very on top, much on top of our capacity moves in the market, and if we see an impact, of course, we will act very -- in a very quick manner.

Okay, thank you, guys.

Appreciate it.

Michael Linenberg, Deutsche Bank.

I want to go back to the commentary in the press release where you called out Brazil, Colombia, and Venezuela as seeing weakness and then went on to elaborate that you were seeing further demand weakness in other markets.

And so, I am curious.

What are those other markets and how does that compare to prior quarters?

Are these markets that maybe have seen a step function down or these are markets that just continue to be week, but they are small and therefore not willing to be called out as a single country?

This is Pedro (multiple speakers) and then I will let Jose.

But when we called out those three markets, it is because those three markets are going to be somewhere between 70% and 80% of the impact, so they are by far the most significantly affected market.

There are markets that are fed by Brazil and Venezuela and Colombia.

For example, Caribbean destinations or Cancun, Mexico, places like that are affected by the feed from those markets, and also some of those markets are affected -- and Mexico has had a over 20% devaluation.

So we are not impacted as much as in these other three markets because we don't have as many flights, and just the impact, the economies are doing better in Mexico and the US are doing better.

So that's why we haven't called out other markets because it would just be divided among too many places.

Yes, but there is a clear breakdown of the effect on our unit revenue performance driven by Brazil, Venezuela, and Colombia.

Those are the three major drivers of this in the percentage that Pedro mentioned.

Okay, great, that's helpful.

And then going back to the Venezuelan bolivars and the possibility that they may have to be written off, do you have in place with your various debt agreements, the way that you calculate your net cash position or the way it is written in any sort of covenants that you may have that by writing down that cash and then taking the hit through the balance sheet, do you run into any sort of potential issues with covenants or metrics that -- thresholds that need to be met?

Any concerns there?

Not really, Mike.

We are not close to breaking any sort of covenants, even if we were to have to make the accounting adjustment with the Venezuela cash.

So we have a very strong balance sheet under all measures without the Venezuela cash included as well.

And then just on that, Jose, you were burning that down by -- it seemed like the run rate was about $4 million, $5 million a month, and it just seemed like that it was a much smaller change year-end 2015 versus September 30 of 2015.

Why that much less of a burn?

It is related to the fact that there are some of our expenses we have put in on a [DAR] basis with some of our suppliers, and also, of course, fuel has come down, fuel prices have come down and the Venezuelan fuel, jet fuel, is sold at international levels, so that's -- so yes.

And it is sold on a dollar basis, so therefore it is -- it does bring down the burning of bolivars.

Okay, then just lastly because no one has asked and I'm getting emails on it, just anything on Zika?

I figured I would ask.

I will take that one.

What is Zika?

Okay.

No, we haven't seen a significant increase in reimbursements.

We have seen a little bit, but it is not -- the numbers are not material.

Our bookings to Brazil, for example, have not been affected.

We could say maybe it is too early, so I don't want to -- I don't want to say that there won't be an impact in the future, but so far we have not seen an impact.

Also, bear in mind that in those markets most of our passengers originate in Latin America, so the Zika scare is not such a big deal.

We are already living in Latin America.

And I guess the main threat is to pregnant women, but pregnant women don't tend to travel that much, so so far we are not seeing an impact.

Okay, all right, great.

Thank you.

Ravi Jain, HSBC.

I have a couple of quick questions.

The first one was, have you seen any change in the competitive pressures from the point-to-point carriers, whether it is the South American ones or the US or Mexican ones?

Have you seen any change?

Have they been more aggressive in cutting capacity as well or do you still see pretty strong competition from them?

This is Pedro.

In the last six months or so, the only change we have seen is some of the major carriers in Latin America taking out some aircraft from their domestic markets, which are affected, like a Brazil, a Colombia, and redeploying those aircraft for international service in and out of their hubs in Bogota, in Lima, even some service international out of Brazil.

So, there has been a little bit more of international hub flying with aircraft redeployed from domestic flying.

Otherwise, we have not seen major changes.

Sure, thank you.

And the other question was more on the cost front, so we understand the nonrecurring one-off costs that could come in 2016, but on a more slightly longer horizon, let's 18 to 24 months, what opportunities do you see for cost efficiencies within Copa?

In what cost items can we see a potential for improvement in the longer term?

This is Jose, Ravi, here.

As I think Pedro mentioned in his comments, we're working in several fronts in terms of our -- the way that we manage the operation in the airport, the way that we have fuel as how we conserve fuel.

We are working very much in the maintenance front in terms of expanding our maintenance facilities here.

So we feel that there is a lot of upside that could certainly bring a couple of margin points associated with our profitability over the next 18 months, and that is something that we are very confident that our already great $0.065 CASM should -- there is room for improvement there certainly over the next 18 months.

Thanks, that's very helpful.

Renato Salomone, Itau Securities.

Regarding ConnectMiles, could you give us an update on the program's evolution and when you expect it to be a margin contributor?

Okay.

So, Renato, this is Jose here.

It's still the beginning of the program.

We are very pleased by its progress up to now.

I think on a P&L basis, on a comparative basis versus the impact that we had in 2015, I think in 2016 we are seeing it flat versus 2015.

We still feel that the true benefit will come as people will start redeeming miles, which is when you get the deferred revenue benefit, and when the credit card program start reaching maturity.

From a cash flow perspective, many of these programs also measure themselves in terms of cash flow.

It will be a positive contributor in cash flow for 2016 for us.

I think in the range of -- I want to say between $13 million in positive cash flow contribution for 2016.

But it's still in its growth phase.

And we feel that the true benefits are going to start coming in towards the latter part of this year, or in 2017.

Thank you.

And also, of the 14 Boeing 737-700s in your fleet, how many are unencumbered?

And I'd like to understand, with oil at current levels, if you intend to hold onto these aircraft for a while longer, or if you still consider subleasing?

Okay, yes.

In terms of unencumbered 737-700s out of the 14, we have 12 that are unencumbered.

At the end of this year, we are going to end up with 12 being unencumbered.

This is Pedro.

In terms of holding on to the NGs, it will depend on how markets and how Latin America comes back in the next number of years.

Because we, as of 2018, we have a number of MAX aircraft coming in, which we could use all to replace NGs, or we could hold onto some NGs.

We will see how things look at that time.

But when we look at new technologies, like a new MAX aircraft or even Winglets, they tend to work within very low fuel prices.

So we think that eventually the fleet replacement will make sense, no matter what happens with the price of oil.

Thank you.

Marcio Prado, Goldman Sachs.

Some questions.

First one is on the hedge.

Just wondered, if possible, if you guys could comment on how the hedge is spread over the year, like on a correlated base from the -- core of what we did at 32% of the jet fuel expense or hedge.

But just wanted to understand, how is this spread over the year?

And also, on the non-hedged jet fuel [parcel], if it has been valued at forward market price; just want to understand that.

Yes, so our fuel price assumption for the year, indeed, has been based upon the futures that are half.

And of course it includes the negative effect of the hedges, including that in the future sense -- or the future credit that we had for jet fuel.

And the breakdown for the year is around -- well, remember, we have two instruments.

We have swaps.

That's for about 28% of the volume.

And that's basically evenly spread out throughout the year.

It's around -- between 27% and 30% per quarter.

And then we have 5% of a zero cost collar that is also evenly spread throughout the year.

Thank you.

And just two follow-ups on previous questions.

First one is on [units].

I think it became quite clear, when Pedro explained the dynamics of units implied in the guidance for the year.

Just wanted to hear a little bit more on a comment during the call about the short-term dynamics.

I think I heard Pedro mentioning that, on a sequential basis, that units in first quarter are already a little bit higher than what we had observed in 4Q in dollar terms.

So, just speculating if we might have seen the bottom, in terms of units in the fourth quarter.

Yes, so this is Pedro, and I'll let Jose maybe add comment.

What I said is that units in the first quarter of 2016 are better than first-quarter 2015.

But I should say that seasonally the first quarter is usually better than the fourth quarter.

So that was expected.

And we don't think that the second quarter of 2016 is usually much lower than the first quarter.

So, I would say that hopefully they will hit bottom the next quarter.

Thank you, Pedro.

And a final one: you've mentioned the capacity reduction in Brazil and also the impact that Brazil, Colombia, and Venezuela had.

If you -- if Copa has, I guess, of the fourth quarter, what is the share?

I remember that Brazil would be around 15% of the business; Colombia and Venezuela, at some time in the past, were similar.

Now, with all the capacity adjustments when we think of Copa, what is the current share that we should think that Brazil, Colombia, and Venezuela separately represent?

This is Jose here.

So, Brazil, from a point of sale perspective, represents -- I'm talking about here (multiple speakers).

You're talking about ASMs.

From an ASMs perspective, we are at around 18% of our ASMs are in Brazil.

Colombia represents about 6.5%, and Venezuela is minor.

It's less than 2%.

Thank you.

Dan McKenzie, Buckingham Research.

Thanks for the color on the cost initiatives over the next 18 months.

But with respect to the revenue initiatives that you referenced in the overview, I didn't hear what those were, exactly.

So I'm wondering if you can just provide more perspective.

And then, secondly, what quarter would you expect both the cost and revenue initiatives to begin being rolled out?

So, revenue initiatives, we're working -- first of all, the first thing that I would mention is capacity.

We're very active in deployment of our capacity throughout the network, throughout the year.

And we're very active in seasonal flying or seasonal reduction, so that's a significant item that we are working on.

Number two, we are working, just in general, RM and pricing moves that we feel are necessary throughout the year.

So these are just general moves that we're making within the RM and pricing area.

We feel those are going to be positive, probably beginning during the half of the year.

And in terms of costs, with those we have already started.

The cost plans that we have are basically -- it's a three-year plan.

And we feel that we would achieve half of our targets by the end of this year, and then be at further level targets during 2017.

Got it.

And how big is that target, when all is said and done?

Well, it's significant.

I wouldn't want to necessarily say, because it's a -- but it's a sizable -- we feel that we can achieve tens of millions of dollars of savings with all the items that we're looking at.

Got it, okay.

And then, Jose, you've been managing the balance sheet conservatively.

And it's pretty obvious that while business is tough, it does seem that there's a fairly clear path here to revenue stability later this year, just given the capacity adjustments you guys have talked about.

I appreciate Copa has bought back $100 million in the fourth quarter from the $250 million authorization, but I guess same question here, different quarter.

What I'm really getting at is, just given the pain that shareholders have endured here, I'm wondering what's holding you back from stepping up the buyback program a little bit more aggressively, just using some modest leverage?

Perhaps related to that, I'm wondering what kind of steady-state leverage you are targeting, and if this is something that the credit rating agencies have suggested they might frown on.

Yes, first of all, we are not rated by credit agencies as of today.

But the fact is that we do want to have our balance sheet run in a very strong way.

We want to have it be a strong, conservative balance sheet.

Having said that, I think we are also leaders in returning value to our shareholders.

So, the $250 million program we have -- that the Board approved -- it was our first program.

It has no time limit.

And after one year, we have completed over half of it.

So we will continue to do so, but at the same time we will balance that with our management of the cash of the Company.

And we will also make sure that we have a very, very strong position in that sense.

And number two is also our dividend.

I think that we're -- our Board, I think, showed a very strong commitment to our shareholders by stating that the dividend basis will be changed from reported net income to underlying net income.

So, therefore, all the -- any effect of any potential of Venezuela outcome will not be affecting the dividend payout.

And at the same time, any non-cash item will certainly not influence the payment of the dividend, namely the hedge effects.

So, we feel very, very strongly that we are achieving a right mix of protecting the balance sheet.

It's very strong; and, at the same time, returning leading value to our shareholders.

Okay, thanks.

Appreciate it.

Stephen Trent, Citi.

Just a few for me here.

The first is when we think about your 2016 initiatives, including unit revenue and capacity growth, any sort of broad color on your expectations on average stage length?

Not really a very big variation in the average stage length for 2016.

Not really in our calculations.

Okay, great.

And then in terms of your fleet, just curious on what sort of flexibility you guys have, in the event that you decide you want to make some more deferrals.

Or any color there would be appreciated.

Sure, Steve.

Again, Jose here.

Yes, if we see that there is a need to further reduce our capacity in the market, we will certainly do so.

Remember, last year, we subleased to our 737s to United, and certainly that is something that could be pursued if we saw that there was a need for it.

Besides that, we have to a sale of aircraft that have lease expirations this year.

We already are returning two aircraft.

Next year there are six lease expirations, so there's also some flexibility on that front.

Great, Jose.

Thank you for that.

And just one last question.

What is your view on the timing, if at all, on Tocumen Airport's addition of a south wing?

Has that changed at all, or what does that look like at the moment?

This is Pedro here, and it seems like it's going to be a 2018 project.

So it's a little bit delayed due to the sign changes and additional work.

However, they have already habilitated eight remote positions that were supposed to be built towards the end of the south terminal expansion project.

So they advanced the building of those eight remote positions, and those are available right now.

So those are an additional parking space that can be used for anybody that needs them, and also as a buffer to the current terminal.

Okay.

Very helpful.

I'll leave it there.

Thanks, Pedro.

Pablo Zaldivar, GBM.

There is just a couple of quick ones.

The first, please, could you give us an update on the implementation of the Sabre software that could give you the potential for other ancillary revenue opportunities?

Right.

This is Pedro again.

At first, we had expected to implement the system by the end of this year.

And right now, it's looking more like first-quarter 2017.

The schedule for the end of this year was way too aggressive.

So the plan is to change over to Sabre in the first quarter of 2017.

Okay.

Perfect.

Thank you very much.

And just going back to your hedge positions, I'm not sure I got the prices right.

Could you just repeat them for me, please -- how they are spread, please?

This is Jose here.

And the average price for the year is $2.35 for the swap portion of our hedges.

And the put price of our zero cost collars is $1.50 -- around $1.50 per gallon.

So that's where the breakdown is.

Okay, okay.

Perfect.

Thank you very much.

That would be all.

Leandro Fontanesi, Bradesco.

So, just the first clarification.

You mentioned that you expect FX depreciation to stabilize in 2016.

So by the stabilization, do you mean that you expect it to remain flat, or do you expect a lower depreciation of the FX?

Because when we are looking in Brazil, for example, economists are still expecting about 10% depreciation effects.

So just a clarification on that front.

Not flat, but that it would be as forecasted, which is a -- much more stable than what we saw last year.

Yes, it won't be the same sort of drop that we saw last year of over 30%.

That's what we mean by this.

And gradual, the way it's been so far this year.

Okay.

And then you mentioned that you're terminating two leases on the E-190, and also you're receiving a 737.

So, this 737 will be used in the same routes of the E-190, or different routes?

Well, it doesn't necessarily work that way.

Our airplanes fly different missions.

It won't necessarily be on a one-for-one basis that it occurs.

But certainly our ASM count, or our ASM on a percent basis, goes up by the fact that we're bringing in a larger airplane.

But the way that we schedule airplanes varies according to supply and demand on a particular market, and on other market conditions.

And let me add to that, that our current fleet of 190s was based on substantial domestic service in Colombia.

We have reduced our domestic Colombian network quite a bit.

So in terms of the right number of aircraft and the right size or gauge, we were a little bit long in Embraers.

So with a smaller Colombian domestic market, we're bringing down the number of Embraer 190s to the right number.

Okay, thanks for the clarification.

And just the final one.

Do you have any updates on your agreement with Delta?

If I'm not mistaken, it expired last year.

And then I'm not sure if there were any developments on that.

Can you give us an update?

Yes, and obviously you meant to say United.

Yes, sorry.

United.

The agreement with United actually expires in May of this year, in May 2016.

And the new one will be signed way before it expires.

Okay, but is that already -- you already have the agreement, that you are going to sign it, that you are going to renew it?

What I can tell you is that I can tell you with confidence that we will sign a new agreement, which will be very similar to the current one, way before it expires in May.

Okay.

Thank you.

Duane Pfennigwerth, Evercore.

Just two questions for me.

One, with respect to the $6.9 million loss related to the devaluation in Argentina, can you tell me what period that relates to, and how much cash you are holding in pesos?

This is Jose here, Duane.

We currently do not hold any significant balances there.

Basically the government there liberalized the exchange rate after they came into power; so, therefore, there is no real limits on repatriations there.

And we do not hold significant balances there.

The impact there was due to the fact that, at one point, when the currency was open, we had to revalue our net asset position in the market.

So, therefore, that's what that is about.

And so basically that's the way that it was valued.

Now, it wasn't necessarily a revaluation of any cash holdings that we had there.

Sorry, so what would be your assets in Argentina, other than cash?

Well, you have receivables.

There are some tax implications as well, and so that is essentially is what is in there.

Okay.

So are you selling in pesos today, or are you selling in dollars?

Yes, yes.

It's totally open.

Actually, it's an interesting aspect that the market has received very well -- the domestic market in Argentina -- or, I'm saying the passenger market from Argentina has done reasonably well over the last several months.

Okay.

And then just for my second question on the lease returns.

Maybe I missed it in your prepared comments.

But can you just quantify, as we think about the bump-up in maintenance and the accelerated depreciation as it relates to lease returns, what is the magnitude of those two buckets here in 2016?

Thanks for taking the questions.

So, yes, Duane, on a maintenance basis, it's around $20 million incremental.

And in depreciation it's -- I think it's really no real impact, I would say.

The majority of the impact is on the maintenance line, and it's about $20 million for the year.

Thanks very much.

Joseph DeNardi, Stifel.

Just wondering if you guys can speak to the demand environment, maybe between corporate and leisure, just given the leg down in oil prices.

Has that resulted yet in any impact on demand?

And is there a lag between the effects on corporate versus leisure demand?

Every market is different, of course, and I think leisure always gets more impacted by things like devaluation.

Although corporate also has -- I mean, corporate in many locations has to scale down, especially when there's economic contraction, which is what we're experiencing in many countries.

So at the end of the day, they have both been affected.

The percentages have not changed much, the relative percentages.

And I would say in the most affected markets, everything is down.

And remember that in most cases, it's not a load factor issue; it's a yield issue.

So, those lower yields benefit travelers the same, or impact travelers the same.

Okay.

And then when I think about what you guys are looking forward to resume higher rates of capacity growth, what would those be?

Is it more maybe getting to flat PRASM at some point this year?

Is that what you are looking for?

Or is it more a stabilization in the macro backdrop?

Just any help there as to what you see capacity growth looking like beyond 2016.

Well, I think it's too early to tell, necessarily, what would happen in 2017.

And I think that the important aspect I would say is that we have a lot of flexibility in our fleet plan, going forward.

We have deliveries and lease expirations that we can manage.

And I think that we'll be very active in the way that we look at our future capacity growth.

But I think, at this stage, it's a little early to tell what happens in 2017.

Okay.

Thank you very much.

Thank you.

Ladies and gentlemen, this concludes our Q&A session for today.

I would like to turn it back to Mr. Heilbron for any final remarks.

Okay, thank you.

Thank you all.

This concludes our fourth-quarter earnings call.

And thank you for being with us, and thank you for your continued support.

Have a great day, and we'll see you in the future.

Ladies and gentlemen, thank you for your participation.

That concludes the presentation.

You may disconnect, and have a wonderful day.