Copa Holdings SA (CPA) 2016 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Copa Holdings second-quarter earnings call. During the presentation, all participants will be on a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this call is being webcast and recorded on August 4, 2016.

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

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

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

Copa Holdings' second-quarter financial results have been prepared in accordance with International Financial Reporting Standards. In today's call, we will discuss non-IFRS financial measures. A reconciliation of the non-IFRS to IFRS financial measures can be found in our second-quarter pending 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, Raul. Good morning to all and thank you for participating in our second-quarter earnings call. I first want to congratulate all of our co-workers for their efforts during this quarter in which we continue to operate in a soft yield environment. We've started seeing some signs of improvement and demand.

Your dedication and commitment keeps Copa at the forefront of Latin American aviation, especially during these more challenging times. As for the demand improvement, we believe that it is partly related to the stabilization of regional economy and the strengthening of most Latin American currencies against the US dollar, which translated into stronger late booking for the quarter.

Just as important, our capacity discipline and commercial focus also paid off, as we saw a significant increase in those factors year-over-year. We also maintain industry-leading unit costs, even during a low growth year, while continuing to deliver the excellent and reliable product our passengers have become accustomed to.

Thanks to all these efforts, we were able to achieve these better-than-expected results. Among the main highlights for the quarter, our unit revenues decreased nearly 8% year-over-year, driven by a 14% drop in yields, but partially offset by an almost 5 percentage point increase in those factors.

Nevertheless, we achieved lower unit costs as lower fuel prices drove CASM down 5.5% from $0.091 cents to $0.086, and our CASM ex-fuel came in at $0.063, one of the lowest amongst full-service airlines. This resulted in an operating margin of 6.9% for the quarter, down 2.2 percentage points from the second quarter 2015.

Although single-digit margins might seem low compared to our historical performance, please keep in mind our operating results include significant realized fuel hedge losses. In fact, excluding the impact of these hedges, our operating margin would have increased by over 4 percentage points to over 11%, a very good result in our low-season quarter during a difficult year for our region. On the operational front, we delivered on-time performance of 86.5% and a completion factor of 99.8%, among the best in the industry.

Now turning to the second half of 2016. Although we continue to experience a soft yield environment, especially in Brazil, Colombia, and Venezuela, the regional currencies have appreciated and late bookings are coming in strong -- usually a leading indicator of improving demand. These stronger late bookings and our disciplined capacity approach lead us to expect higher year-over-year load factors, mitigating the effect of lower yields.

As a result, our revenue outlook for the year has improved, and we are updating our full-year guidance to reflect the higher load factor, the higher corresponding RASM, and operating margin.

Despite our capacity rationalization, we continue to look for opportunity to strengthen and complement our network, and add unique markets that lack connectivity to our regions. In June, we added two new destinations -- Chiclayo, Peru; and Holguin, our third city in Cuba. In July, we began service to Rosario, our third city in Argentina.

These three new destinations have had a great start, and continue to show strong growth load factors for the coming months. In fact, we are already increasing Rosario to daily service starting November 1, 2016.

In terms of fleet, in June, we received one new Boeing 737-800, our only delivery for 2016. During the second half of the year, we expect to return two leased Embraer 190's to end the year with 99 aircraft -- one less than 2015.

During the quarter, we also reached an agreement with Boeing to defer four additional aircraft scheduled for delivery in 2017. Thus, we will now only receive two Boeing 737-800's next year and return one leased aircraft, once again taking advantage of the flexibility embedded in our fleet plan to adjust to an evolving demand environment.

In July, we celebrated the first anniversary of the launch of our ConnectMiles frequent flier program. We are pleased to report that consumer response has been very positive, and we have surpassed our goals for enrollment and member adoption. As this program ramps up, we become more encouraged by its potential. We also recently launched a renewed website and mobile apps, which provide our customers with an enhanced service experience and new features that should drive additional direct sales.

Also during the quarter, we renewed our long-standing alliance and co-chair agreements with United Airlines. Through these agreements, we extend and strengthen our strategic partnership by increasing our reach in domestic US destinations via coach sharing, expanding our passenger base via reciprocal SSP cooperation, and continuing several other mutually beneficial initiatives.

Finally, I am very proud to mention that a couple of weeks ago, we were recognized by skytrak as the Best Airline in our region, while also earning awards for Best Airline Staff and Best Regional Airlines -- a true testament to the efforts of all of our co-workers and our focus on customer satisfaction.

To summarize, the regional economic environment began stabilizing, and we're starting to see some signs of demand improvement. We have been able to increase load factors and partially offset the ongoing softness in yields to a very practiced and disciplined approach to capacity, as well as other commercial actions. Our team continues to deliver world-class operational performance while achieving industry-leading unit costs.

And lastly, we are more confident than ever in our business model and our financial position. We have the strongest network for travel within the Americas, an extremely flexible fleet plan, the lowest unit cost, a very strong liquidity position with low leverage, and a highly committed team. So we are better-positioned to come out stronger from this downturn and cautiously optimistic on the improving demand patterns.

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

Thank you, Pedro, and good morning, everyone. Thanks again for joining us. I want to join Pedro in congratulating our entire team, particularly highlight their focus, discipline, and success in controlling our costs, which are a strong component of our Company's corporate culture, and have led us to continue delivering strong results.

During the quarter, revenues decreased 8.2% year-over-year to $494 million. Yields were still under pressure, coming in 14% lower than Q2 2015, mostly due to the continued yield softness in Brazil, Colombia, and Venezuela.

In order to adjust to this demand environment, we continued our capacity discipline strategy, slowing down growth and reducing capacity to the lowest performing markets, which produce an available speed mark contraction of 0.4% year-over-year for the quarter.

This, combined with an increase in revenue passenger miles of 6.2% resulted in a 4.9 percentage point increase in load factor, which averaged for the quarter a healthy 78.3% systemwide, especially good for a low season quarter. Due to this increase in traffic, our unit revenues came in better-than-expected at $0.093.

Our second-quarter operating expenses decreased 5.9% year-over-year and our cost per available seat mile decreased 5.5% to $0.086 from $0.091 in the second quarter of 2015. Lower capital was driven mostly by [21%] lower jet fuel prices. For the quarter, our CASM ex-fuel came in at $0.063, even though our [station] increased by almost 4% and our capacity was essentially flat year-over-year. These excellent results are a reflection of our continuous work on our cost savings initiatives. For the second half, we expect to have a slightly higher ex-fuel CASM given timing of certain expenses.

As you can see, the reliable delivery of our product with low unit costs continues to be one of our Company's main focus areas and one of our core strengths. In terms of operating results, consolidated operating earnings for the second quarter came in at $34.2 million, representing an operating margin of 6.9% -- 2.2 percentage points less than the 9.1% achieved in the second quarter of 2015.

As Pedro mentioned, it is important to highlight these results include the negative effect of significant realized fuel hedge losses. Including these realized hedge losses, our operating margin for the quarter would have been 11.2%, and a very strong 17% for the first half of the year. In terms of net results, net earnings for the quarter came in at $54.5 million or earnings per share of $1.29 compared to last year's second-quarter net income of $64.1 million or $1.46 per share.

When excluding extraordinary items, meaning the fuel hedge mark-to-market gain of $40.6 million. Underlying net income for the quarter came in at $21.5 million and earnings per share of $0.51. Compared to last year's second-quarter underlying net income of $41 million of adjusted earnings per share of [$0.93].

With respect to fuel hedges, we haven't taken any new positions since July of 2015. We ended the quarter with hedges for 32% of our second-quarter fuel volume. For the rest of 2016, we had 32% and 35% of projected volumes of Q3 and Q4, respectively, mainly using jet fuel swaps at an average equivalent price of $2.39 per gallon, so we will continue to expect significant negative fuel hedge effects the rest of the year.

In 2017, our position remains unchanged. Less than 6% of the projected volume covered with jet fuel swaps with an average price per gallon of $1.80.

Turning now to the balance sheet, assets reached almost $3.8 billion at the end of the quarter. (inaudible) equity totaled approximately $1.7 million, debt plus capitalized leases total $2.1 billion, and our adjusted net debt to EBITDA ratio came in at 2.8 times, which continues to be the lowest 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 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 $765 million, an increase of $41 million since the close of the first quarter. And [12%] approximately 36% of last 12 months revenues.

In terms of fleet, we ended the quarter with a fleet of 101 aircraft; 64 737-800's, 14 737-700's, and 23 Embraer 190's. Year-to-date, we have already taken delivery of one new Boeing 737-800. During the second half of the year, we expect to return two Embraer 190's to end the year with a fleet of 99 aircraft, a decrease of one aircraft compared to the fleet at the end of 2015.

Finally, as for our Company policy on September 2015, we will pay our third-quarter dividend in the amount of $0.51 per share to shareholders of record as of August 31, 2016. Going back to results as a recap, the continued stabilization of currencies is contributing to an improving air travel demand environment albeit at continued low yields. We are receiving significant benefit from lower fuel prices and continue delivering leading unit costs and continue to look for further efficiencies.

We have a very flexible fleet plan, which has allowed us to match our capacity to the current demand environment. And we continue having one of the strongest balance sheet in the industry.

In terms of our guidance for full-year 2016, based on our latest assessment of the demand environment and fuel prices, we are updating our 2016 full-year guidance as follows. We are maintaining our capacity growth in terms of ASMs of plus or minus 2%. We are increasing our load factor to plus or minus 79%, and thus are increasing our (inaudible) guidance to plus or minus $0.098.

We are maintaining our CASM ex-fuel guidance at plus or minus $0.064. We are lowering our fuel price assumption for the year to an effective price per gallon of $1.75, including into plane and net of hedges. And with respect to operating margin, we are increasing our guidance to a range of 11% to 13%.

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

(Operator Instructions) Hunter Keay, Wolfe Research.

So it's a little bit unconventional for you guys to see -- to change the load factor guidance this much. I'm curious to know what is driving that? Is it more -- are you engaging in maybe some nonstop price stimulation? Or are you maybe sort of using the token and the hub a little bit more -- some more connecting volume over the hub to drive a little bit of load there? So if you could give us some color in terms of what is driving that load factor higher, that would be great. Thank you.

Yes, hi, Hunter. Pedro here. I think the first thing to think about is that capacity -- we actually had negative capacity growth even though slightly in the second quarter. Whereas in the previous five years, we have always been growing quite a bit, so we always have to deal with that increased capacity to fill all the additional seats. So we been a lot more discipline in managing our growth for sure, but also in a low (inaudible) reductions, which have all been bottom-line positive. So I would say that is number one.

Obviously, we're seeing a better demand environment going forward with the currencies and the economy stabilizing. And we have also taken commercial actions as necessary, so I would say it's a combination of the three factors.

Okay. And then as you are seeing a little bit more rational competitive behavior from the industry down there, do you have an opinion on how permanent this is in the sense that the type of capacity that has been taken out, is there a risk that you see maybe coming back? Or are you seeing maybe more long-term actions taken, like planes being put down, airports being vacated? What do you feel like this is sort of more like utilization stuff that could come back in the event that things start to feel a lot better maybe for everybody as you look out over the next 6 to 9 to 12 months? Thanks a lot.

In our particular case, we've made some decision that can force us to be rational this year and next year. As I mentioned, we have deferred (inaudible) deliveries, so we are going -- our (inaudible) has stayed pretty much the same that year, this year, and next year. And we think most of our competitors -- at least our original competitors are doing something similar.

So I would not expect any radical change from where we are right now, at least not this year and next year. They make yes, this is those -- I think that the capacity outlook that we're seeing, at least for now, seems to follow what has been going on in the second quarter. And so it's kind of in line with what we have seen until now in that type of quarter.

Thank you both.

Savi Syth, Raymond James.

Could you provide a little bit more detail on maybe -- since Brazil, Venezuela, and Colombia are the ones that are seeing the most pressure, maybe how they progress through the quarter and maybe how they are looking on a go-forward basis? I wasn't sure if this kind of improvement was broad-based or if it's certain markets where they are recovering faster than others.

Sorry, this is Jose here. I think we've seen it across the different markets where we operate. More anything on traffic that we are seeing. More than on the yields. We're still seeing some softness in the yield environment. I would say, Savi, that we want to stretch the capacity discipline strategy that we are following -- we have followed.

I think due also to the fact that we've been very effective in our fleet flexibility and it's paying off, and we're seeing it pay off in markets such as Brazil, for example, where traffic seems to be at least holding its own versus prior periods.

And in terms of -- Pedro here. Sorry, I'd just add, we are seeing strong late bookings, so that makes it maybe a little bit harder to predict, but if we go by the recent past, we would expect a -- yields to, let's say, start deteriorating and PRASM to maybe start improving towards the end of the year, including in those markets we just mentioned.

Got it, that makes sense. And then if I -- just a follow-up on Hunter's question on the load factor. Is -- I don't think you've ever had -- I think your guidance implies 80% load factors in the second half, and I don't think we've ever seen that. I think it's historically been more 75% -- the high 70's.

And I guess understanding your comments about slowing growth, that allows you to do that. Is there something about your market mix that might be helping? I know there's a little bit -- maybe your (inaudible) is coming in. So as things recover, what I'm trying to understand is do we go back to that -- yields improve and we go back to that it's 70%, high 70% level? Or do you think you have figured out a way to better fill up the aircraft through this downturn?

Well, the thing is, is that we have always been growing our hub quite a bit at a rapid pace at times. And it's a very strong hub. We always advertise the strength of our hub. The points we connect, et cetera. And this time around, we have stuff that grows. So we are growing actually nothing this past quarter and very little for the rest of the year.

And I think what we're seeing is the power of the growth -- I'm sorry, with very little growth reflecting into the load factor. So I think that has a lot to do with -- and again, proactive actions we are taking to rationalize capacity in strengthen the bottom line. Going forward, again, it will depend on the opportunities, but we are always managing PRASM and we're always managing our bottom line. So we will make the decision to make us more profitable going forward. That's the way we have always operated airline.

Okay, helpful, thank you.

Ravi Jain, HSBC.

Just following up on Savi's question on Brazil, Colombia -- capacity cuts, but on the other hand, I think we have seen some capacity additions into Central America from both North America as well as South America. Have you seen some marginal yield pressure in Central America? That would be my first question.

The capacity additions -- most of the capacity additions we've seen don't really affect us that much -- are in markets where we don't really compete like US to Central America. We're not that active in that market, although we do connect some via Panama, we're not really a big player in that market.

I would say that net-net, we see more capacity reduction in markets that we compete in the capacity as happening in markets where we don't really compete. So, no, we are not seeing anything different from what we've been living for the past year and a half to everything we talked about.

Perfect. And just another question if I may. More on hedging policy, have you put some thought on at some point, beginning to start protecting your 2017 exposure either with different strategies like options, et cetera? Have you put some (inaudible) and I would love your thoughts on that.

Yes, we haven't finalized our thoughts around further hedging in 2017. As you know, we have a big exposure for this year. About a third of our volume hedge. We will represent over [$90 million] of impact for this year. And for 2013, we're still reviewing what is the best option for us going forward.

Okay, thank you so much, that's helpful.

Helane Becker, Cowen and Company.

I just have a question about -- I think, Pedro, you said that you were adding service to Rosario and you're going to Delhi because the demand was so strong. Is there any other -- are there any other markets where you are seeing that kind of demand that could support either -- they can support more service? Or is -- are there any other markets that -- where you would have to think about reducing some service? Maybe moving aircraft around some more?

Right. So we're doing that a lot in terms of analyzing all of our markets and reducing service and even getting out of markets that are not producing and do not have a bright future. So we have gotten out of some markets in the last few months and we have also added others.

So we're moving around our airplanes to make sure that, again, we strengthen our bottom line and we take advantage of our vast network. So the answer is yes, there are a few other markets where we could add frequencies. And we will publish those and you will find out the minute we publish those slides. But it's pretty much the same capacity. We're just moving it around to make sure it's more profitable.

Got you. And then can you just give us an update on the airport construction? Because I think for a while it had stopped or maybe it had slowed. So I was kind of wondering if there was anything new there?

Yes, there are news there. Good news. The construction did not totally stop, but slowed down quite a bit while the airport was being redesigned for the better in new construction. And the Authority -- the Airport Authority was negotiating with constructors the adds -- the new design changes and the cost of it.

So they have reached an agreement -- it has been approved by the government. They issued a new bond recently so they have the money, and the construction has restarted at full force. And it is now expected to be ready in the first half of 2018. However, this month, we've got eight new remote positions which are from the new terminal. They already habilitated eight new remote positions. And the plan is for the end of next year, they will get to use some of the gates that are closer to the current terminal. So that is ongoing well again.

Great, okay, thank you.

Michael Linenberg, Deutsche Bank.

Just with respect to the changing guidance -- the bump up in the loads, it seems like a pretty significant increase and yet no change to your CASM ex-fuel. And I'm just curious about what is the potential offset to the revenue-related costs that you would incur carrying what seems to be a lot more passengers?

Mike, this is Jose here. We are comfortable with our fixed floor guidance. We are implementing quite a bit of efforts internally to ensure that our already very competitive ex-fuel unit costs remain the same. I mean, we are eliminating initiators and maintenance and airports, et cetera, to ensure that we maintain the unit costs as they are. And so we're very confident of our [6.4] -- that we're going to achieve [6.4] for the year. So it is I guess a balance between the incremental passengers and the savings that we have in our plans.

Okay, great. And then just with respect to fuel hedging, some markets -- fuel surcharges are common, some they are not. Some they are not even allowed. Do you have a sense of what percent of your system where fuel surcharges are commonplace? And maybe even any markets that you serve where fuel surcharges are not allowed, they are illegal -- which I'm not sure if there is actually any that you serve that fall under that?

Yes, I think today, Mike, there is -- really is a very small minority of markets where fuel surcharges are prevalent. I think that with a few drops that occurred, it really -- it doesn't represent a large component of airfare, at least in this part of the growth.

All right -- Jose, I think you misheard me. Are there any markets where you can't have fuel surcharges as part of your pricing structure? Where they are illegal? Like the US domestic market is a good example of that.

This is Pedro here. Mike (multiple speakers) I think there's some markets. They are not significant either. But nowadays, the way prices are displayed is that we have to show on price. It doesn't really matter that much if it's a fuel surcharge or not. Just passengers see one fare.

Okay. Pedro, since I have you, just one other. In your press release, you call out weakness in Colombia, Venezuela, and Brazil. And yet Argentina right now you can argue is in the midst of a recession.

June quarter should contract a few percent. I think most economists think that you're going to see contraction in the third quarter as well. You didn't call that out as a weak market and I'm just -- I know you are adding service in new cities and upping frequency and so maybe, there's a little bit of a financial renaissance going on here.

Because things weren't allowed to behave I guess economically, given the previous -- the role of the previous government. So is that really what's going on here, is that you sort of have this unleashing of demand? And it's more than compensating for the fact that the overall economic backdrop in Argentina is -- you know, you can say is in a recession?

Well, yes, we have just added one city, Rosario; we added four frequency going up to daily in November. But that's the only capacity we've added in over eight years. So even that is not that much when you think of the time that's gone by. So there's not a lot of new capacity in the market, and in terms of air travel, we have not noticed a significant drop in volumes.

Okay. Very good, thank you.

Renato Salamone, Itau.

Could you please give us color on the timing for the implementation of SaberSonic? I believe it's at some point next year, but how is that being -- looking? And also help us understand the opportunities that will come along with this platform and the evolution of Copa's new commercial strategy and the vision that Dennis Carey has brought to the team.

Okay, yes. So we expect to get -- to start reaping the benefits of a new PSR system in the second half of 2017. So by the second half of 2017, we should have most of the functionality that we do not have today.

But I will say that the bigger benefits will come in 2018, because 2017 will be kind of a spool-up year, so in 2018, when we expect to see the major benefit -- we will see some in 2017 for sure, but more in 2018. And the opportunities I will highlight to significant opportunities, which we cannot take advantage of today for lack of a proper PSS system.

One is fare family. You've seen how airlines in other parts of the world, especially in the US, are being more competitive, taking some of their lower fares to a fare family grouping that allows to offer less hurt. So that's something we cannot do today and should make us more competitive once we have our new PSS.

And then the bigger opportunity with Ancillary -- there's very little -- almost nothing we can do with Ancillary today. And our Ancillary revenues as a percent of the total, it's very, very small. So we're going to be able to double -- at least double that number in the coming years with a new PSS.

Okay, thank you. And if I may have a follow-up question, with demand bouncing back and delivery of deferrals that you mentioned, how should we think of average aircraft utilization in the upcoming quarters potentially bouncing back from the low levels that we're seeing today?

I think there is an opportunity for that going forward, although one of the things we are not going to -- we are very focused on that as part of our strategy as we're very active in a seasonal management of our network. And so I think that has been our focus for now. I think as things stabilize, we will probably have opportunities to increase capacity in certain times of the year, but I wouldn't necessarily see a large change in aircraft utilization, at least in the next 6 to 8 months.

And about -- and for 2017, what is the average level the we can think of?

It's still preliminary. I think we're still looking at our 2017 plan as such. I would say that you can expect at least in -- I will probably put it in terms of -- instead of aircraft utilization, I would say that our ASMs are probably going to be growing at low-single-digits for next year more than anything.

Thank you.

Duane Pfennigwerth, Evercore ISI.

Thanks for the time. Could you go over your aircraft deliveries 2016, 2017, 2018, where those stand? Sorry if I'm asking you to repeat that.

Yes, so for this year, we're going to end the year with 99 aircraft, which is a net drop of one aircraft versus where we ended in 2016. And then in 2017 --

Sorry, sorry, what were the deliveries? I know you've got some coming in and some coming out. I'm trying to get CapEx.

Yes. For this year, we are taking delivery of one 737-800 and returning two Embraer 190 aircraft. So it's a net reduction of one aircraft of the year. And then for 2017, we will take delivery of two 737-800s and return one further Embraer aircraft and -- so that will have our net [growth] of aircraft for the year of one. So we will end the year with 100 aircraft.

And then in 2019, we -- I think still preliminarily -- we have still a lot of flexibility in the plan. We have our first 737-MAX delivery swinging in the latter part of 2018. We have five deliveries coming in, but still in 2018, we have quite a bit of flexibility in terms of these returns and deliveries. So that one I will probably say that it's still with quite a bit of upside or reductions, depending on how we see the environment.

So where do you see total gross CapEx aircraft and non-aircraft CapEx in 2017 and 2018?

Okay, so 2017, our total CapEx -- our cash CapEx is going to be --

I'm sorry, not cash -- gross CapEx. The value of the aircraft you are bringing on plus your non-aircraft CapEx.

Yes. So that's about $200 million and -- north of $200 million for 2017.

And 2018?

In 2018, it's going to be higher than that. It's going to be probably about $300 million -- north of $300 million for 2018.

Okay, thanks. And then what was the currency benefit to your nonfuel cost structure in the second quarter? And how should we be thinking about the trajectory of your nonfuel costs? It looks like the schedules are showing you are modestly cutting capacity as we enter 2017. I don't know if those schedules are up-to-date, but it looks like capacity growth might be down 1%, 2%, early part of next year. How should we be thinking about your nonfuel cost structure?

For the full year 2017, as I mentioned earlier, I think that our capacity should be in the growth of the low-single digits. And in terms of unit costs, I would say, at least for this year, where we are giving guidance, they were expecting it to be at [6.4]. I don't envision them coming up; actually envision them coming down.

We are working very hard in terms of pursuing further opportunities. Remember also a large a portion of our fleet is the 737-800, which has a lower unit cost than aircraft that we operate. So we feel that they are -- we feel pretty confident that all level of ex-fuel CASM execution that we have going forward, even in 2017.

Great, and then just lastly, where do you see the breakeven fuel price net of your hedges? So you had some hedge losses this year, but let's say oil is $50 next year. Is it even? Is it $50, is it $45? Where does your fuel price flat year-over-year in 2017? Thanks for taking the questions.

In terms of flat versus what, Duane?

Versus 2016. So let's say if oil is $50 next year, is your fuel price flat net of hedges?

Yes, it should be around $42 per barrel. That's basically around -- low 40's should be a average price that we are guiding for this year in terms of brand. So that's the figure.

Okay, thanks for the time.

Dan McKenzie, Buckingham Research.

Pedro, your commentary on last-minute demand was interesting, and I'm just wondering which countries specifically are you seeing that last-minute booking strength? What I'm really trying to get a sense of here is just last-minute demand for long-haul versus short-haul versus medium-haul flying across your network.

I don't have it broken down that way right away right now, but from what we've seen, it's most markets. I mean, it's not limited to a long-haul or a short-haul market. It's -- some of the short-haul markets that we operate have a higher percentage of business traffic, and that's always going to have a shorter booking curve. That's normal.

And so it's a long-haul market, which is in our case, or longer haul, not really long-hauls -- it's maybe happening more than in the short-haul market because we're being used to it more, as I mentioned before, in those shorter markets with a higher percent of business traffic. But again, it is not one particular segment. I think we're seeing it throughout the network.

Okay. And then maybe I can get at it a little bit differently here. How would you -- as you look at the last-minute booking strength today, or at least in the second quarter, how would you characterize that relative to, say, most of the end markets were in a recession right now, and it was sort of a decent economic backdrop, how would you characterize where we are in that recovery continuum?

Well, I don't know. I think that it is -- I think the way that we frame it is that we are leasing that the -- there is no further worsening of the demand environment where the yield environment, but it's certainly still what we're seeing is that yields are still depressed versus prior-year. But that traffic is responding very late into the booking curve. So whether that means that there's recovery, I think it's probably too early to tell, but at least what we're seeing is that there is no further deterioration of the environment.

Very good. If I could just squeeze one more in here. Jose, what would the operating margin be in 2016 but for the out of money fuel hedge? And the reason I ask about the last-minute yields is investors are really trying to understand what normalized margins for Copa could be over the cycle here. And I know, historically, 2005 out of the IPO, they were consistently 18% to 20%. I don't know if you guys are willing to share sort of how you're thinking about that target over the course of the cycle here, but that's really where I was really trying to go with this all.

Sure, Dan. Yes, this is Pedro again. We think at the midpoint of our new operating margin guidance, the margin for 2016 without the fuel hedge losses would be 17% -- one-seven. And this is 17% in obviously a challenging year for the regional economy. So it says a lot about the strength of our business model.

And to that, Dan, you can add in the coming years, the potential of ancillary revenues, the SSP program maturing, and some of the other initiatives we're working on. So I think we can get back to our averages.

Terrific. Thanks so much, guys.

Stephen Trent, Citi.

Thanks for taking my questions. When you guys talk about boosting ancillary revenue over the medium-term, is there any view from you guys with respect to whether a mix of your passenger flow should tilt a little more towards leisure/VFR passengers versus business in contrast to what it's been traditionally? Or do you not think that we should see any significant change in the mix?

Yes, Stephen, I don't think we're expecting major changes from the normal max we've always had. It's always going to change a little over time as we grow and depending on which markets we answer, but we do not expect significant changes overall. And the potential in ancillary, there's a lot of opportunity to market -- I don't know how you call it, but products that our Company would be willing to pay for within the current mix of passengers we have.

Got it. That is very helpful, Pedro, thank you. And just one last question. When I think about your fleet over the next couple of years, do you kind of have any general thoughts about what is optimal with respect to leasing versus buying? I want to say several years ago, you guys had owned almost all of your claims, and you tilted a little bit towards lease maybe with some of the next-gen stuff coming, but I would just like to get your thoughts on that. Thanks.

Yes, Steve, this is Jose. Our current makeup of the fleet is about two-thirds owned and a third under operating leases, and we feel very comfortable with that for a couple of reasons. One, it really has allowed us a lot of flexibility in the fleet line. I think that's one of the most important highlights of our current strategies, that is the fact that we have a set of aircrafts under operating leases, under staggered expiration dates has allowed us to shrink and grow the fleet as the conditions warrant it.

So it's a very important aspect. And we feel that we will continue that going forward over the next couple of years.

Okay, very helpful. Thanks, Jose.

Juan Pablos Palasueloz, GBM.

Thanks for taking my call. So we have seen that in the last month, a lot of airlines have been leaving the Venezuelan market while you have chosen to stay. So could we get some additional color into that?

Yes, it's Pedro here, Juan Pablos. In the case of Panama Venezuela, it may be a little bit different than other markets in the sense that there is a large Venezuelan community in Panama that travels often between our two countries. So there's a need for the service.

Obviously you have come to the home. It goes through cycles -- short cycles where few months it does well and then its troubles for another two months. So it's a very erratic and hard to predict the Venezuela market right now, but we are keeping our head above water, I should say.

Overall, we're not losing money, although it's not like we are making a lot of money either. But we're keeping our head above water, and we're serving a very important end market, which -- it's important now, it is going to be even more important in the long run. So we've made an effort to trim our capacity during the low season and manage it as best as we can to keep a significant presence in continuing serving a market, as I just mentioned. It's important for us.

Okay, thank you. Also, could we get some outlook on your ConnectMiles loyalty program for the following month -- or following years, please?

Yes, Juan Pablo, this is Jose. For this year, the program -- first of all, the program is progressing as we expected. For this year, it should be cash positive for the business at around, I would say, north of between [$10 million and $15 million possibly] for Copa Holdings from the cash flow perspective.

And we expect it to -- from an accounting perspective, break even in 2018. So it is -- just because of the accounting of loyalty programs, there is a lot of deferred revenues associated with it -- I'm sorry, 2017. I said 2018. It's 2017, where we expect to be breakeven from an accounting perspective.

Okay. So can I ask one last question? So you mentioned that deals should continue to be weak for the second half of the year, but I was wondering if we should expect a recovery in 2017?

This is Pedro. So yields will continue weak in general terms, but less so than in previous quarters. And we're expecting PRASM to actually be positive towards the end of the year.

And then for 2017, hopefully -- so we would expect, as the economy has stabilized, we would expect yields to improve next year. But the interesting thing is that the way we are running the business in terms of capacity, at unit cost and managing for PRASM, is that we feel that we can still show strong results even in a weak yield environment.

Okay, thank you very much.

Lucas Barbosa, UBS.

Thank you for the opportunity. Congratulations on the results. Actually this is Rogerio here. I have one question. Actually it's a follow-up from a previous question on the guidance.

When you do the calculations for the second half of this year, we calculate that the RPM should increase by around 90% year-over-year; load factor increase [4.6] percentage points, and yields, when we adjust them seasonally for the quarterly seasonality, we think that yields should improve additional 10% in the second half versus second quarter for Copa should deliver its guidance off RASM and load factor.

So basically, what I would like to hear you is, is this calculation making sense? And if there is a yield increase, where do you expect this coming from, if it's mostly from Brazil? We know that capacity has been reduced drastically in Brazil. And if you can say how much do you expect internationally using Brazil to go up in the second half of the year? So yes, this is basically it. If there is not -- if it's not only Brazil, if you could speak a little bit about other regions as well.

But that's my question. Thank you.

Yes. Yes, no, that's very good. Indeed, the implied second-half performance is not unlike what you are talking about. It is driven mostly by the load factor gains, but you are also seeing a shortening of the gap on yields versus the first-half of the year. So you are seeing essentially that there is a -- somewhat of an accretion in yields for the second-half compared to those in the first half.

Of course, you have to also consider that there is some seasonality involved and that the second half is seasonally stronger than the first half, but indeed there is a -- an improvement, sort of slight improvement in terms of yields for the second half of the year versus what we have in the first half.

And where is that? I think that in general terms is across different markets that we have. I would say that we are pleased by the capacity reductions that we've made in Brazil, and I think that the market is responding to those. Other markets I would say are performing reasonably well in terms of both the traffic and at least the flattening out of the yields that we are seeing in the very closed-in period.

So I think that Brazil has a -- an improved performance such as what we had seen prior, mostly driven by capacity. And I would say that there's other regions that are kind of falling in line with that as well.

Okay. And you think that after this improvement in Brazilian yields in second half versus first half, do you think we are going to reach an equilibrium already? Or there is more room for you to improvement in the coming year? Thank you.

I think it's too early to tell. What we're seeing right now, at least in the way that we're framing it, is that it is a -- we're seeing that the market has kind of stopped deteriorating, but it is too early to tell still. We are very keenly focused on our commercial and capacity actions throughout the network and in the Brazilian market as well.

Okay, thank you very much. Congratulations again.

Thank you.

Michael Linenberg, Deutsche Bank.

Just a quick one here for, Jose, and you may have mentioned this, I apologize. Just your tax rate for the year. You were under 10% for the first half. Similar tax rate for the full year? Or what should we use?

Yes, Mike, it should be between 10% and 11% for the full year. That's around where it should be.

Okay, great. Okay, thanks, Jose.

Thanks, Mike.

Renata Stuhlberger, Goldman Sachs.

This is actually Marcio Prado. Two quick questions. One is a follow-up about the (inaudible) that you just mentioned. When we look at the new guidance, I just wanted to confirm that most of the improvement coming from your new rising guidance comes actually from the high (inaudible) than actually in expectation of higher yields. And I just wanted to confirm that.

We know that yields will improve given seasonality, but I'm thinking of yields on a more normalized basis. And then on that question, what do we need to see in terms of load factor of the market to start seeing yields increasing from this normalized level?

And second question is more on the Panama market. Wanted to hear from your guys if there's any impact from the finalization of the construction of the second part of the Panama channel with regards to where traffic -- into and out of Panama? Thank you.

Okay, so the answer to your first question is yes. To the second part of your first question is right now what we're seeing is that the deterioration of yields have slowed down and continues to slow down in the third quarter and fourth quarter. So maybe that trend is telling us that eventually we will have positive yield growth. But right now it is slowing down the deterioration, which is very good. Most of the benefit does come from higher load factors, as you all mentioned.

And in terms of Panama, so yes, the new Canal inaugurated towards the end of June. That is really good news for the country. We are starting to see improved Canal revenues, which will mean additional resources for the government to invest in our economy. So Panama is today the highest or fastest growing economy in Latin America. I think we have the means to keep that going in the coming years.

Thank you, Pedro. Thank you for the answers.

And our last question comes from the line of Duane Pfennigwerth with Evercore ISI. Please go ahead.

Just want to follow-up on the hedging. Do you have any sense for where your competitors or what you consider to be your competitors are hedged at this year is -- are most of your competitors also above market?

I don't have the full answer to that, Duane, but I would -- I don't want to guess that. The -- I guess I'm really focused on our own -- on our business, but I would say that more than likely from what we've seen, they have lower hedge positions from what we have. So I would say that when we look at our numbers, so when we look at our EBIT margin ex-fuel hedges -- ex-realized fuel hedges, I would say that the gap probably widens when you take out the hedges on our main competitors.

The reason I ask is because we've seen in other markets when folks are hedged above the market, that's actually reflected in the pricing trends. And when those hedges roll off, it can actually cause pricing to go down, not up, as you suggest in 2017.

And then the second question is, I thought Mike's question was very helpful about the full-year tax rate. It's certainly been bouncing around. But why do you have a 10% tax rate? Is that the corporate tax rate in Panama?

It's Pedro here. It's -- no, it's a combination of every country we do business in, and it just varies quite a bit. So I mean it would take a while to go into detail, but it varies quite a bit. And you need to understand that Panama does not tax foreign income. So being based in Panama, it has an advantage.

What is the corporate tax rate in Panama?

25%, if I'm not mistaken.

25%.

25%.

But remember it's a territorial tax [redeem].

Thanks for the time.

Thank you, Duane.

And ladies and gentlemen, this concludes our Q&A session for today. I will turn the call back to Pedro Heilbron for final remarks.

Okay, thank you. This concludes our second-quarter earnings call. We will be having our Investor Day on September 22 and 23. So hope to see some of you here in Panama. Thanks for your time, and as always, thanks for your continued support. Have a great weekend.

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