Copa Holdings SA (CPA) 2016 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Copa Holdings first quarter earnings call. (Operator Instructions) Afterwards, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this call is being webcast and recorded on May 6, 2016.

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

Thank you very much, Esther. And welcome everyone to our first quarter earnings call. Joining us today are Pedro Heilbron, CEO of Copa Holdings; and Jose Montero, our Chief Financial Officer. First, Pedro will start with our first quarter highlights, followed by Jose who will discuss our financial results. Immediately after, we will open up the call for questions from analysts.

Copa Holdings first quarter financial results have been prepared in accordance with International Financial Reporting Standards. In today's call, we will discuss non-IFRS financial measures. A reconciliation of the non-IFRS to (technical difficulty) -- are discussed in our annual reports filed with the SEC.

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

Good morning to all and thank you for participating in our first quarter earnings call. I first want to congratulate all of our co-workers for a solid quarter in a very challenging environment. Given the downturn in the regional economy, it is important to highlight that we're doing a very good job in controlling our costs and delivering our product reliably.

I would also like to take this opportunity to thank Rafael Arias, our Director of Investor Relations, for his 13 years of contribution to Copa Airlines. As many of you know, Rafael has decided to take on a new professional challenge and this will be his last earnings call. Rafael will be replaced by Raul Pascual who has over 10 years of experience with the Company in the areas of network and fleet planning, treasury, revenue analysis, and strategic alliances. Although we're sad to see Rafael leave and are grateful for his contribution, we're very confident in Raul's ability to lead our Investor Relations group.

Now turning to our main highlights for the quarter, our load factor came in almost 1 point higher year over year at 77.4% as passenger traffic grew over 3% on a 2% capacity growth. Yields, however, came in 15% lower mostly driven by continued weakness in Brazil, Venezuela, and Colombia. On a positive note, lower unit revenues were partially offset by lower cost as CASM decreased 10% from $0.93 to $0.83 and ex-fuel CASM came in 3% lower at $0.62.

As a result and despite $29 million of realized fuel hedge losses for the quarter, we delivered a solid operating margin which came close to 17%. On the operational front, we continued delivering the world-class product our passengers expect from us. Our system-wide on-time performance came in above 90% consistently among the best in the industry.

So overall, we had a very solid quarter. Turning now to the rest of 2016, in terms of fleet we will now receive one new Boeing 737-800 and return two leased Embraer 190s closing the year with 99 aircraft, one less than the end of 2015. Furthermore leveraging the flexibility in our fleet and continuing with our plan to exercise capacity discipline, we have deferred two additional aircraft originally scheduled to be delivered in 2017 which will result in no aircraft growth next year as we will now have six deliveries and six expiring leases. This underscores the flexibility we have embedded in our fleet plan and our willingness to adapt to a changing demand environment.

Regarding our network, we have scaled back capacity in our most affected market. Specifically in Brazil we have reduced capacity by almost 30% year over year as of March and in Venezuela we have cut about 20% year over year as of April. We also continue being more thorough and proactive in terms of adjusting and relocating capacity to better reflect demand and seasonality in our market. Nevertheless we continued to look for opportunities to strengthen our network. In our last earnings call we announced our first new destination for 2016, Holguin, our third city in Cuba, which will start in June.

More recently we announced two more destinations, Chiclayo in Peru also starting in June and Rosario, our third destination in Argentina starting in July. These routes will provide unique feeds 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 continue work in several initiatives that will ensure the long-term loyalty of our passengers.

As an example, we continue developing ConnectMiles in order to enhance our service and provide incremental value to our customers, improved marketing and promotional capability and grow ancillary opportunities. And we're in the process of launching a new mobile app platform as well as improvements to copa.com in order to provide enhanced service for our customers and drive further direct sales.

Turning to our financial outlook for the year, we're seeing continued weakness in the regional economy. In fact, the IMF recently updated its 2016 economic growth forecast for Latin America to a 0.5% contraction, worse than last year and worse than expected in the IMF's previous outlook.

In recent weeks we have seen a rally in regional currencies. Some of the most affected currencies, the Brazilian real, the Chilean and Colombian pesos have gained ground against the US dollar. We should eventually be positive for the region. We have also seen capacity rationalization by other carriers which in one way or another are slowing down their growth.

Stronger currencies and ongoing capacity rationalization should signal a better revenue environment. However, we still haven't seen this materialize in the short term and are facing a challenging second quarter with operating margins that could come in at low single digits. Given this weak economic environment and the impact from a higher fuel expense, we're updating our full-year guidance to a 9% to 11% operating margin.

To summarize, we're pleased by our first quarter results. However, the regional economic environment remains weak and in the second quarter, our low season quarter, we're facing significant yield pressure mostly from Brazil, Venezuela and Colombia. We're taking steps to mitigate this impact by reducing capacity mainly in Brazil and Venezuela and also reducing capacity growth for the year.

Our team continues to deliver world-class operational performance, and in spite of the downturn in the economies of Latin America we have the best network, on-time performance, lowest unit costs, strongest balance sheet, and remain focused on creating value for our shareholders.

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

Thank you Pedro, and good morning everyone. Thanks again for joining us. I also want to congratulate our entire team for their efforts during the first quarter. I want to particularly highlight our discipline in controlling costs which is a key pillar of our performance in this challenging economic environment.

Before going over our quarterly results, I'd like to mention some important recent developments regarding Venezuela. In our annual report released this week, we decided to adjust our cash balance spending repatriation in Venezuela. Specifically we transitioned our cash to the SIMADI exchange rate, now called DICOM, which stood at VEF198 per dollar. This adjustment generated a negative impact of $430 million to full-year 2015 resulted in a reporting net loss of $224.9 million last year.

You might recall back in February our Board of Directors approved a change to our dividend policy calculating the payment of our annual dividend based on adjusted net income rather than reported net income. Given this change to our policy, the dividend payouts are not affected by the nonrecurring loss related to the Venezuela cash balance. Therefore there will be no change in Copa Holdings' announced quarterly dividend payment $0.51 per share for 2016.

Continue our efforts to repatriate our remaining funds in Venezuela. In fact, during the month of March we repatriate $18.6 million corresponding to our March 2013 sales. This was paid at a SICAD rate of VEF13.5 per dollar that resulted in a non-operating currency exchange gain for the first quarter.

Turning to our financial results for our first quarter, our revenues decreased 11.8% to $557 million. We grew available seat miles by 2% year over year, yet passenger -- revenue passenger miles increased 3% year over year. As a result, consolidated load factor came in at 77.4%, a 1 percentage point increase over Q1 2015. Nevertheless, passenger yields were down 15% mostly driven by the yield decrease in the Brazil, Venezuela and Colombia markets.

On the expense side, first quarter operating expenses decreased 8% year over year and our cost per available seat mile decreased 10% to $0.83. The lower CASM was driven by 27% reduction in fuel unit cost and to lower jet fuel prices, and a 3% improvement in ex-fuel CASM which came in at $0.62 mainly due to weaker currencies, contract renegotiation with suppliers and other savings.

In terms of operating earnings, consolidated operating earnings for the first quarter came in at $94 million, with an operating margin of 16.9%. In the first quarter, we also generated a non-operating net income of $32.8 million consisting mainly of a $27.4 million non-operating gain due to a fuel hedge mark-to-market with $18.1 million non-operating income largely due to the currency exchange transaction of the approved Venezuela repatriation and $6.5 million in net interest expense driven mostly by reduction of interest income in Venezuela.

So in terms of net results, net income for the quarter came in at $115.4 million or earnings per share of $2.74 compared to last year's first quarter net income of $113.2 million or $2.57 per share. Excluding the fuel hedge mark-to-market gain of $27.4 million and the $18.1 million currency exchange gain, adjusted net income for the quarter came in at $69.9 million or earnings per share of $1.66, a 34% year-over-year decline compared to last year's first quarter underlying net income of $106.1 million or adjusted earnings per share of $2.41.

With respect to fuel hedges, we ended the first quarter with hedges for 32% of our fuel volume. For full-year 2016, our hedge positions remain unchanged. We are hedged for 33% of our projected volume mainly using jet fuel swaps at an average equivalent price of $2.35 per gallon and zero cost collars with a put level at $1.51. For 2017, we have approximately 6% coverage using jet fuel swaps at an average price of $1.80 per gallon. I'd like to add that we are currently reviewing our hedge policy and we have not closed any new hedge positions since July of 2015.

Turning to the balance sheet, assets reached almost $3.7 billion at the end of the quarter. Owners' equity totaled approximately $1.7 billion, debt was capitalized, leases totaled $2.1 billion, and our adjusted net debt to EBITDA ratio came in at 2.8 times, one of the strongest in our peer group.

In terms of debt, we closed the quarter with approximately $1.25 billion in bank debt, about 60% of which is fixed rate debt, with a blended rate, including fixed and floating-rate debt of approximately 2.6%.

Looking at cash, short- and long-term investments, we closed the quarter with a very strong balance of $723 million.

So to recap, demand for air travel in our region continues to be affected by lower economic growth and devalued currencies in Latin America. However, we have the strongest network for intra-Latin America travel. We continue to excel in our delivery of low unit cost. We have one of the strongest balance sheets in our peer group. We continue returning value to our shareholders.

In terms of our guidance for 2016, given fuel prices, the economic outlook in the region, and demand trends, we're updating our 2016 full-year guidance as follows: we're lowering our capacity growth in terms of ASMs to plus or minus 2%. Load factor is expected to come in at plus or minus 76%. Based on our near-term forecast and visibility, we're lowering our RASM guidance to plus or minus $0.96. We're lowering our CASM ex-fuel guidance to plus or minus $0.64 cents.

We're increasing our fuel price assumption for the year to an effective price per gallon, including inter-plane and net of hedges, of approximately $1.80, up from $1.70 in the previous guidance. In respect to our operating margin, given our lower unit revenues and the increase in our fuel price assumption, we're lowering our guidance to a range of 9% to 11%.

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

Thank you. (Operator Instructions) Mike Linenberg, Deutsche Bank.

Just a couple of questions here. In the press release you talk about the unit revenue weakness due a large part by the reduction in yields in Brazil, Venezuela, and Colombia, but then the release goes on to say as well as further demand meet weakness in other markets. And I'm just curious, I mean we've been focusing on Brazil, Venezuela, and Colombia, what are those other market, what are the other markets that may be contributing to some of the weakness?

All right, we're waiting here for questions, so -- so I know that the first question was from Mike Linenberg, but unfortunately we can't hear the question, so we'll try to fix this technical issue and get right back to you.

(Technical Difficulty) -- back. So Operator, can we restart the questions please? Thank you. Apologize for that.

(Operator Instructions) Mike Linenberg, Deutsche Bank.

Just a couple here on the press release, and I can -- maybe to you Pedro. In the press release, you do highlight the fact that the lower unit revenues are driven in part by the reduction in yields in Brazil, Venezuela, and Colombia, but then the press release goes on to mention further demand weakness in other markets. And I'm just curious what other markets, where are you seeing some of that additional weakness? Is this just what started in a few countries is now spreading to other countries? Can you just provide some detail behind that?

Yes, well, it's over 80% is the three markets you just mentioned.

Okay.

So there's another -- so we didn't want to just say that it just goes a 100% those three, but it's over 80%. So whatever it's in other markets, it's not really significant and all these are markets that are a result of these three markets. So obviously less feed to the north from Brazil is going to affect overall yields in that market, but again the rest is spread in less than 20%. So there isn't a single significant one.

Okay. And I just was trying to get at like if you were seeing any point of sale weakness in the United States? I mean I think that the March quarter GDP print coming in 0.5%, you had a lot of people initially calling for 2% plus growth back in December and January for the March quarter. So the US got a lot weaker, and I just -- I was wondering if you were referencing maybe point of sale weakness of north, but it sounds like maybe that that's not what you were referencing.

Let me look for that number. Did you have another question, Mike?

Yes, you can -- we can go offline on that. Let me just -- if I can jump to one more. I mean look, you had indicated that we were likely to see you were going to eventually deal with the Venezuelan cash position and you had talked about it, so we saw that occur in this quarter. But what I was actually surprised by was the fact that you were actually able to get some cash out of Venezuela.

So what was the catalyst for that, number one? Number two, should we expect that there could be more over the next few quarters? Even if it's $18 million a quarter, that's real, that's real money. So what was the catalyst and what should we expect? What rabbit -- how are you able to pull rabbit out of the hat because I don't think anybody else has been able to pull this off.

Yes, Mike, this is Jose here. So yes, we have been negotiating for a long time with the Venezuelan government and indeed we got payment for one month of sales that were from -- it was our oldest pending payment from the Venezuelan government during the first quarter of $18 million. And I think that was due to all the negotiations that we've been pursuing over a long period of time. But I don't really think that there is a high probability that we get a regular schedule of payments at least in the short term, although we continue engaging with the government in trying to reach a resolution to the pending amounts that we have, I think that I wouldn't hold my breath for incremental, or a regular schedule of payments.

What -- Mike, what Jose is saying is that it took us over a year of visits and negotiations. So we probably have to wait at least another year, but we don't really know.

Okay. That's fair enough.

I mean, we're still engaging. That's I think an important aspect of it.

Okay, very good. Thank you.

Duane Pfennigwerth, Evercore.

Can you quantify the amount of interest income that you recognized last year on your Venezuela cash?

Yes, you know what, I -- just to address a little bit of the interest income, I think that the first aspect that we have to mention is from an accounting perspective, we really needed to use one exchange rate for our financial statements and we were using the official exchange rate which airlines were mandated by the Venezuelan government and so that's the reason why we reflected that. I'd say the way to look at this is we feel that the -- at least that comps on a yearly year basis, if you look at our interest income line, you see that it's off year on a year-over-year basis about 55% and I think that that's essentially how that account is going to behave or that line is going to behave throughout the year. So I guess that's the way to look at it.

So the $3.5 million decline in interest income, just that times 4 would be the magnitude of the income that you're realizing on your Venezuela cash last year?

I'd say that that's an accurate comp to make, yes.

Okay. And then can you talk about the unit revenue decline you expect in the June quarter and maybe third quarter, fourth quarter underlying your revised guidance?

Yes, in -- so we're seeing from a unit revenue perspective a year-over-year decline in the second quarter in the low teens for the second quarter. We're seeing -- specifically the second quarter which is the quarter for which we have the clear visibility right now, we're seeing all on a year-over-year basis on around that kind of low teen level. For the second half of the year, still very little visibility and that's kind of what's we -- that's what's driving the reduction in our unit revenue guidance for the full year.

Pedro, have you -- you reflected at all on the Company's historic policy of providing revenue guidance, I mean, I certainly appreciate last year was a dynamic macro backdrop with lots of moving parts currencies, et cetera, but it just feels like it continues to be optimistic in nature and negatively impacting the Company's credibility.

Oh, yes, it's a good question. We have not decided to do otherwise, we have decided to continue. And obviously this is the second year of a revenue rollercoaster in Latin America where it's almost impossible to predict what's ahead. As you saw, we had a fairly strong first quarter, and we -- I mean lower year over year unit revenues, but okay at very acceptable levels and the visibility we had -- the last time we had this call was just that, that first March quarter and we've been surprised by a much lower than expected second quarter.

So that's going to turn around at some point. It has to turn around. Airlines will have to have capacity discipline and rational pricing. The economies are going to at one point stabilize. We see the currencies strengthening a little bit, but does that mean that it's -- that it's going to normalize in the very short term? We don't really know. We just kind of have to go with the visibility we have which right now is the second quarter and expect that at some point things are going to go back to a more normal level, if not at the same levels we saw before. But again, we've always provided revenue guidance and I don't know if it's the time to change it, but we'll see.

Thank you for the time.

The market in terms of being -- trying to see or present what we see in the most clear way that we know.

Savi Syth, Raymond James.

To kind of follow up on kind of Duane's question, just as you're thinking about the second half, could you just share what reflected -- I mean from a margin perspective, I mean I don't think we've seen this much of a decline from 1Q to 2Q historically. And so you're thinking -- I mean in the past I think you said you're thinking of maybe normal seasonality as you think of the progression for the rest of the year. Is that not how you're thinking about it and is that driven by fuel or are things kind of continuing to get worse on the revenue line and therefore you're just more conservative on the second half?

Right. This is Pedro. I'll try to kind of partially answer your question and then let Jose give us more detailed information. The second quarter is our seasonally lowest quarter of the year. The third quarter is usually a strong quarter and so is the fourth, although with the realities we're living right now, it's a lot harder to predict what's ahead. But we think of the second half of the year, we are expecting the second half to be slightly below year over year, so slightly below the second half of 2015 which was as we know very weak from a year-over-year unit revenue perspective.

And we're also expecting the second half to be slightly below the first quarter of this year. But at the same time we're expecting the second half to be, let's say, in the neighborhood of 10% -- and this is all unit revenues, right? In the neighborhood of 10% better than Q2 which we're forecasting to be quite weak.

So it's not an overly aggressive second half of the year but since we have little visibility right now, we're not throwing in the towel either. We're saying, okay, it's going to be down year over year, it's going to be down versus the first quarter, but it should look better than the second quarter. Now we have very little visibility, so that's kind of going back to Duane's question in reference to giving out revenue guidance when we're not really 100% sure of how the economies are going to behave, how is competition going to price, et cetera. So Jose?

Yes, and in terms of margins I think stepping back a little bit, Savi, first, we have to say also our guidance that we're providing today the effect of the reduction here that we're -- that we put in operating margin guidance is mostly driven by the increase in the assumed fuel that we have. So most of the decrease in the guidance is driven by the increase in the assumed fuel price.

Having said that, the second quarter operating margin does look to be low. It's going to be in the low single digits. And so that suggests that the second half goes back -- kind of reverts back to the average or within the range of the full-year guidance that we're providing.

That's helpful, thank you. Just on the -- I wonder if you can provide an update on just how that credit card revenue is ramping up, as well as maybe on the timing, if you have any more insight into the timing of the CSS system rollout.

I'll address the CSS -- Pedro, and I'll let Jose answer the credit card revenue inflow. I don't know if he has it with him right now, but the CSS a transition that we're working on should happen in the first half of 2017, so in the -- towards the end of the first quarter of 2017. And then from then on we should be able to implement certain -- let's say ancillary opportunities that we do not have today which will probably kick in, in the second half of 2017, and maybe we'll get full benefits in 2018.

So 2017 is going to be a transition period and I don't know that we're going to do a lot of new initiatives right away, right after switching on the CSS a project, but for 2018 for sure, we'll see -- we should see significant impact.

And Savi, in terms of revenues, you step back, if you look at it from the standpoint of just plain bookings, we're kind of flat versus last year, but the issue is the yields at which those earnings are coming, so that seems to be off versus last year somewhat given the lower yields that we're seeing this year is less.

Got it. All right. Great, thank you.

Joseph DeNardi, Stifel.

So Pedro, you guys were able to take down your capacity growth for the year, but also lower your unit cost guidance, so I'm wondering how much more you can take out of the capacity side without impacting -- negatively impacting CASM and then how much did the capacity growth reduction benefit your revenue guidance?

Okay. So I'll let Jose address your question, but let me first say that when we take capacity, we're looking at bottom line resource, so we're not so focused on how it's going to affect our unit cost, but we're looking at how much total cost we can save and what percent of those revenues we can retain in our other flights. So when we take capacity out, it's going to have a positive bottom line effect, even though it might affect unit revenues or it usually does. So it's just how we look at it. And then I'll let Jose address the specifics.

Yes. In terms of our unit cost, there are I think three main drivers here. The first aspect that makes the unit cost go down in this guidance is the fact that we have lower revenues. So lower unit revenues, they're driving down the cost figure there. Number 2 is FX. We have some expenses that are in local currency, and so the fact that we're seeing still a weakness in some of these markets as projected itself into the cost. And number 3, we've been very aggressive in pursuing savings within the Company in different areas, renegotiating contracts with suppliers et cetera, and that has also contributed to our view on a lower unit cost that we're projecting for the year.

Okay. And then Pedro, I think your agreement with United expires this month. Can you just provide us an update on where this negotiation stands, and does the agreement just kind of go on and definitely as is until a new agreement is reached?

Well, not necessarily, but that -- those negotiations have basically concluded, and we've all been busy doing a million other things, but I think we can assume that those agreements would be renewed before they expire. So I think that would be a very fair assumption for alternate.

Okay, thank you very much.

Helane Becker, Cowen and Company.

I just have a couple of questions. One, does your guidance include the Rio Olympics and the expected decline in business travel during that time-frame?

I mean it does include it in the sense that we're not expecting a material impact during the Rio Olympics. There will be -- there will probably be a somewhat of a decline in business traffic. At the same time there will be some additional economy class or just traffic in general, and it will probably all net out and we just don't see a positive or negative impact during the Olympic. And let's remember the Olympics are a two-week event, so --

And in one city also.

Yes and just one city, so.

Okay. Okay. So it's unlike the World Cup where it kind of affected the whole country two years ago. It's just a one city?

Well, the World Cup, yes. The World Cup is -- was like eight, nine cities, the whole month. And all of America is passionate about the World Cup. The Olympic is not as big a news in our part of the world, so it would not change that much the traffic patterns.

Okay. And then my next question is you guys have an awful lot of aircraft on order and I know you deferred a couple of aircraft that you mentioned during your prepared remarks. Is there a way to go back or have you thought about going back to Boeing and deferring additional aircraft from that large aircraft order?

Yes. Right now we don't think we need to. The way we structured that order which is basically the Max order you referred to, one is that we have slight rise, so we can actually defer a reasonable number of aircraft every year without having to ask Boeing for it. So that's already structured in the order. Plus the way we also have the order plan is that it will coincide with a number of both lease expirations and owned aircraft that reached let's say 15 and 20 years of age which will be very easy to get rid of.

So if we had to let's say grow very little for the foreseeable future and that number we're expecting by the way, but in a -- like in a really negative scenario, we have a way of doing that without really having to renegotiate with Boeing. Having said that, we've been able to defer aircraft with Boeing in the past and in the recent past and if we have to do a little bit of that, we are confident that we will be able to continue doing it. So we're quite comfortable with our freight plan and the flexibility it gives us to adjust capacity through demand reality.

Okay. And then my last question is just, I think that Venezuela is just $45 million or $47 million of revenue last year. So it looks like the decline in unit revenue might be more focused on Brazil and Colombia. So are those markets significantly worse than you were thinking they were going to be?

Well, yes, I'll start and maybe Jose wants to add something. You're totally right. It's -- Brazil and Colombia carry much more weight than Venezuela. So you're right there. And yes, they are much weaker than what we were expecting and in the second quarter especially. So we've also lowered somewhat the forecast for the second half of the year even though not as much as what we're seeing in the second quarter which is the lowest season quarter, for those markets and for Copa in general, but yes, I don't know if you want to add something.

Yes, the only thing is as you mentioned, yes, Venezuela right now represents -- it's in the low single digits in terms of total percent of revenues of the Company. But it has created also a very steep reduction in its unit revenue performance in this quarter and what we're seeing for the second quarter as well. So the drop has been fairly large year over year, but it is a small portion of the Company's business.

Okay. Thank you.

Hunter Keay, Wolfe Research.

So Pedro, I think you mentioned the lack of rational pricing in capacity discipline. So that implies to me that you're allocating some of the blame here on poor RASM trends to some sort of self-imposed penalties that the industry is doing in terms of the things that you just mentioned. So if you had to sort of break-down the headwinds between fixable problems and just macro, how would you allocate that?

Okay. That's an interesting question. So I don't know how easily I can blame one or the other because you never know until you know in many of these things like a fair actions and the like capacity et cetera. So -- but let's think of the currency devaluation in the field. So right now, I think the currency is probably 30% down or in that neighborhood, in that neighborhood year over year, and we've seen moments were fares are 50%-60% below on a year-over-year basis.

And in general, I think even other airlines have reported unit revenues upwards of 40% below in Brazil. And load factors are not affected nearly as much. So a lot of traffic has been incentivized or maintained. So one could argue that there's room for pricing rationalization in that market and for sure in other markets.

We also have to think that a lot of the capacity was put in let's say, or planned for in 2014 when things looked a lot better and then things turned south, and no pun intended there, and it takes some time -- more time to take capacity out than what it takes to plan and put it in. So we have reduced capacity in Brazil 30% year over year, and as of March. And when we look at what other carriers are doing, so, lately we're seeing other airlines cutting Brazil, mostly Brazil.

We have not seen as many reductions in the other markets of South America. But in Brazil, we've seen a number of carriers reducing capacity as of late. So that's a good signal and hopefully with the currency stabilizing, with capacity being rationalized, then we'll see eventually a healthier yield environment, but it's not what's happening in the second quarter for sure.

Okay. Thank you. And then given that the strength of your balance sheet relative to some of the other competitors in your region, are you guys -- it seems unlikely to me that you and your Board are thinking about starting to take seriously dramatic action because I would imagine there's sort of a even if things get worse, we're going to be the last guy standing. So are you guys planning for a scenario where you have competitors liquidating, and you're able to get a little bit acquisitive and buy some properties or assets at cents on the dollar, or is your sort of extreme scenario involving you guys making your own dramatic changes not involving spending money in buying up cheap assets?

Yes, we don't -- in this business it's usually a big mistake to do anything hoping for your competitors to disappear, to go away. So I would say that we're probably going to be -- do a little bit of everything in the sense that we're going to do what's right for Copa, what makes Copa more profitable and adds value for our shareholders. So that's going to be a priority.

But we're not going to do anything radical for what you said. We're in the strongest position. We have the strongest balance sheet, the most complete network, best unit cost, highest on-time performance et cetera, et cetera. So we're not going to do anything radical that we don't need to do, but at the same time, we will do certain things to make us stronger and more profitable because that's going to help us come out of this crisis a lot stronger than out of our rivals. So we want to be smart and not go to either extreme.

Thank you, Pedro.

Pablo Zaldivar, GBM.

I just have a couple. In terms of yields, I don't know if you could give us a little bit of more insight of what you're looking at in the second quarter, even I don't know if you could give us a break-down of what you're seeing in your main markets like Brazil and Colombia?

Okay. So --

Yes, Pablo, it's Jose here. We're seeing in these three markets yield drops in the second quarter on a year-over-year basis that is certainly in the double-digit range. And in some cases even above 20% on a year-over-year basis. So --and that's again the Colombia, Brazil, and Venezuela weakness that we still are seeing represents about 80% of the total effect on our unit revenues for what we're seeing. So it is significant in the case of Brazil and Venezuela, even more so in the case of Colombia, but certainly they are way above even 20% yield drops for the three markets.

Okay. Thank you very much. That's helpful. And I don't know if you care to share any updates regarding the ConnectMiles program. I don't know if you have any new information that you can share with us about its performance.

We're -- without necessarily going into too many specifics, we are pleased with the performance of the program up till now in terms of its growth. The program in terms of P&L contribution, we expect it to from an accounting perspective be break-even or close to break-even during 2017. And this is just simply because of the way that accounting works in terms of the deferred revenue of the miles, the program issues. But from a cash basis, it is a contributor to our cash performance for the year and we're very happy with the performance of the program.

Perfect. Thank you very much. That will be all by me. Thank you.

Dan McKenzie, Buckingham Research.

Couple of questions here. With respect to the sequential deterioration versus the prior outlook, I appreciate that 80% of the revenue weakness is linked to three countries. That's really clear. I'm wondering how you would characterize the weakness from a leisure versus corporate travel perspective. So what's happening on the corporate side versus the leisure side? And then related to this, how would you characterize any weakness, any incremental weakness tied from the ultra-low-cost carrier growth in the region?

Okay. So you think with the weakness we're seeing is that it's mostly yield-related and I mean, and maybe the low yields are generating enough traffic to keep load factors at the previous year's levels. But whatever the reason, it's a yield -- it's really a yield issue. So the leisure traffic is there. It's I would say strong, but a much lower yield and business traffic tends to take advantage of that also, especially a lot of the business we get in our part of the world are small merchants or small companies et cetera that sometimes are willing to adjust their travel plans to take advantage of certain fares. So I would not say that there has been a change in the amount of business and leisure travel or the relation between both and actually both groups are traveling at lower yields, leisure much more than business for sure.

Then I guess Jose, I'm wondering if you can talk a little bit about the development of the new revenue management system? I'm wondering what new capability it's going to give you that you didn't have previously and specifically I'm wondering if it's going to give you the ability to un-bundle your product or perhaps the ability to rollout an economy-plus type product. I know that you've referenced that, but last time I think you mentioned there was nothing on the table at this point. I'm just kind of wondering what the update here might be.

Yes, so all of the above. I mean we will be able to do all those things that you described that we cannot do today with our currency FX system, and it's not that we -- any of those things are on the table, but they're not off the table either. So in the past and in the recent past we have not been able to do more than a few things because of our CSS limitations. So starting mid of next year 2017 we'll be able to do more, we'll be prepared, and we should see some impact in 2018 for sure.

Okay. Thanks for the time, guys.

Stephen Trent, Citi.

Most of mine have been answered, but just one or two, actually if you could refresh my memory where we are with the expansion of Tocumen Airport, the south wing and when should we see something concluded there?

The work -- I mean the complete work is going to conclude sometime in 2018, probably towards mid-2018 is what we understand. But we're hoping and the plan is to make some gates available as early as second half of 2017.

Okay Pedro, that's helpful. Thank you.

And Stephen, I should say that they have already made available eight additional remote positions which are part of the new terminal project.

Got it. Thank you, Pedro. Just one other thing -- one other question and I'll let someone else ask, as you look at where the equity -- your equity stands today, have you guys given any thought to putting a little more muscle into your share buyback program?

We've been focused this morning in preparing for this call, so honestly we haven't been looking at what you just said, but we'll take a look after we hang up, don't worry.

Okay, fair enough. And I'll let someone else --

(Inaudible).

I'll let someone else ask a question. Thanks Pedro.

Rogerio Araujo, UBS.

I have one follow-up on Tocumen Airport. It's very difficult to think right now on a scenario where Copa would be able to expand its number of aircraft significantly and not being able to complete the new gates that it will be enabled in the Tocumen airport. So my question is regarding new competitors in Tocumen, do you think it could happen after its expansion? And if so which could be the impact for Copa?

No, we -- no, we don't think that additional competition in Tocumen is really directly related to the airport expansion or to capacity because up until now there has not been capacity restrictions at Tocumen. So -- and Tocumen is kind of a first-serve first-come type of airport. So right now the airport is congested during certain peak hours, but off-peak there's plenty of capacity, plus what I just mentioned is that they just opened or made available eight additional parking positions even though they're remote positions, but the distance is not much. So no, we don't see a direct correlation there.

I'd say even the expansion of the airport is yet another benefit to our business model in the fact that our home airport continues and has continued to improve its infrastructure along with our -- with us. So it's -- we actually see it as a big benefit to our business model going forward.

And then actually the delay in completing the work, it's not a problem either because as we mentioned we will have flat fleet growth next year, we will not add net aircraft next year. So we will not be needing a lot more space at the airport. And then maybe by 2018 we can start growing again and then the airport will open then. So the timing seems to be the right one.

That's very clear. Thank you very much.

Josh Milberg, Morgan Stanley.

Thank you very much. My questions have been addressed.

Marcio Prado, Goldman Sachs.

Just two brief follow-up questions. First one is on capacity redeployment. Pedro mentioned that you already reduced capacity in Brazil by about 30%, but just wanted to understand if there is still room for capacity redeployment within Copa's region of operations, I mean, and where capacity taken out from Brazil, Colombia and Venezuela could still be going? That will be the first question.

And the second question is related to the cycle. I mean, Pedro mentioned that capacity cuts have been implemented by several of Copa's competitors and the yield guidance already provides a framework for the recovery in yields. But just if you could comment that if you think that higher oil prices could actually prove to be slightly positive as a way to accelerate capacity cuts and yield recovery in the region particularly by US carriers?

Yes, so that's what we're hoping for. I'll start with the second part first. That's what we're hoping for, but it's hard to predict. And we're forecasting a yield recovery from the second quarter, but not from the first quarter and not from year over year, from the previous year. So we're forecasting a small decline year over year for the second half, second half versus second half and versus first quarter, and a recovery versus second quarter which is looking extremely weak.

In terms of -- yes, so hopefully with the currency stable and fuel slightly up, eventually we'll see also yields recuperating at least somewhat, not what we're seeing right now. In terms of capacity, we are doing a few things. One, we're going -- we're reducing one aircraft this year, so some of those capacity cuts are we're going to get rid of the aircraft. And secondly, we're actually parking a lot more aircraft during our low season.

So we do a little bit more flying in the high season, but a lot less flying in the low season and that's why we brought down our ASM forecast in this guidance. So we're not redeploying that capacity from Brazil to other markets because that will just kind of be exporting the problem from one place to the other, so we're not doing that either. I don't know, Jose, if you want to add something or --

No, I mean, the only thing is that we've been very active also in redeploying the capacity. As Pedro mentioned earlier we have started flights to Holguin in Cuba, we're starting Rosario in Argentina and so we are -- we've been very active in also in the redeployment of the capacity going forward.

Thank you Jose. Thank you for the answers.

Okay. Okay, I think the --

I would now like to turn the call back over to Pedro Heilbron for closing remarks.

Okay, sorry. So, okay, so thank you. I think this concludes our first quarter earnings call. Thanks for being with us. Thank you for your continued support and I hope you have a very good weekend. Thank you.

Ladies and gentlemen, this does conclude the program. Thank you for your participation in today's conference. You may all disconnect. Everyone, have a great day.