Copa Holdings SA (CPA) 2016 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Copa Holdings' third 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 November 9, 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 third 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 third 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' third 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 third quarter earnings release, which has been posted on the Company's website, copa.com. In addition, our discussion will contain forward-looking statements, not limited to historical facts, that reflect the Company's current beliefs, expectations, and/or intentions regarding future events and results. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially and are based on assumptions that are subject to change. Many of these risks and uncertainties are discussed in our annual report filed with the SEC.

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

Thank you, Raul. Good morning to all and thank you for participating in our third quarter earnings call. I first want to congratulate all of our co-workers for their efforts during this quarter. Their dedication and commitment keeps us at the forefront of Latin American aviation. During this third quarter, we saw a clear improvement versus 2015 and the first half of 2016, and believe that the worst is behind us. We are still operating in a soft yield environment, but the year-over-year gap is narrowing. And with a visibly stronger demand environment and more stable Latin American currencies, we believe it's only a matter of time until we see strengthening yields.

Furthermore, during the quarter we delivered the highest quarterly load factor in Copa's history, completely offsetting the yield softness and producing higher unit revenues year-over-year for the first time in two years. This was achieved in large part through a disciplined capacity approach and better commercial execution. As always, we also maintained industry-leading unit costs while continuing to deliver the excellent and reliable product our passengers have become accustomed to.

Among the main highlights for the quarter, our unit revenues increased nearly 2% year-over-year, driven by an 8 percentage point increase in load factors. Our yields are still down about 8% year-over-year, but the gap has narrowed significantly. We achieved lower unit cost. Lower fuel prices drove CASM down 3% from $0.092 to $0.089 and our CASM ex-fuel improved about 1% year-over-year to $0.064, one of the lowest among full service airlines and an outstanding achievement in a low growth year. This resulted in an operating margin of 13.6% for the quarter, up 4.3 percentage points from third quarter of 2015. Also keep in mind our operating results includes considerable realized fuel hedge losses. In fact, excluding the impact of these hedges, our operating margin would have come in more than 4 percentage points higher to over 17%.

On the operational front, we delivered on time performance of 90.1% and a completion factor of 99.8%, once again placing us among the best in the industry and even more impressive when considering the record load factors achieved during the quarter. Looking at the remainder of the year, in the fourth quarter, we are seeing a continuation of improving demand trends and expect to deliver higher year-over-year unit revenues. However, we have seen an increase in fuel cost early in the quarter, which could put some pressure on fourth quarter unit costs. Based on our recent performance and given the visibility for revenues and costs for the rest of the year, we are updating the full-year operating margin guidance to a range of 12% to 13%.

In terms of fleet, during the quarter, we returned two leased Embraer 190s and expect to end 2016 with 99 aircraft, one less than at the end of 2015. In 2017, we will receive two Boeing 737-800s and return one more Embraer 190 for a net growth of one aircraft. As we have previously shared with you, we have developed a plan that should drive our operating margins back to the high-teens during the next couple of years by means of several initiatives and actions. The most important of these actions being the rolling off of out-of-money fuel hedges that have caused additional expenses of close to $200 million over the past two years; the upgrade of our reservation system platform enabling us to offer ancillary products without eroding the quality product our passengers have become accustomed to; the implementation of cost saving initiatives which we expect will generate sustained savings across many areas of the Company; the improvement in our commercial execution to better serve a more dynamic demand environment; and as we announced recently, the introduction of a new business model in Colombia to more effectively serve our domestic and off-hub network. This initiative should help us achieve and maintain higher margins even in a soft demand environment. Notwithstanding, we expect the Latin American economies to start recovering in 2017. So, there should be additional upside on that front as well.

In terms of our Colombian operation, I am very proud to mention that on October 20, we announced the launch of Wingo, a low-cost, low-priced option for travelers looking for a simple, no-frills travel experience. Wingo will start flying on December 1 with four newly configured Boeing 737-700s and its operation will encompass our domestic Copa Colombia routes, existing international routes from Bogota to non-Panama hub destinations and select routes to and from Panama Pacific airport, one of the other two smaller international airports serving Panama City. Wingo has an independent, exclusively dedicated commercial and planning team led by Catalina Breton, a dynamic and knowledgeable airline executive with experience in the low-cost model as well as the Latin America region. Although truly a low-cost operator, Wingo will also benefit from Copa's economies of scale and operational support.

To summarize, in terms of the demand environment, we believe the worst is already behind us. We've been able to increase load factors and totally offset the ongoing softness in yields through a very proactive 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. We're focused on executing several initiatives that are aimed at increasing our margins. And lastly, we're as confident as 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.

Now, I'll turn it over to Jose, who will go over our financial results for the third 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 and particularly highlight the 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 increased 4% year-over-year to $569 million. Yields were still under pressure, coming in 7.6% lower than Q3 2015. However, as expected, the year-over-year gap in yields has narrowed significantly.

We continued our capacity discipline strategy and grew only about 2% year-over-year for the quarter. Leveraging our better demand environment and through better commercial execution, our revenue passenger miles increased 12.7% year-over-year for the quarter, resulting in 8 percentage point increase in load factor, which averaged a very strong 84.2% system-wide, our highest quarterly load factor ever. Due to this increase in traffic, our unit revenues came in at $0.103, 1.8% better than Q3 2015. Our third quarter operating expenses decreased 1% year-over-year and our cost per available seat mile decreased 2.9% to $0.089 from $0.092 in the third quarter of 2015. The lower cash year-over-year was driven mostly by a 5.9% reduction in jet fuel expense and a reduction in the other operating expense line driven mainly by a reduction in non-cash cost related to the launch of ConnectMiles in 2015.

For the quarter, our CASM ex-fuel came in 1% lower year-over-year at $0.064, especially good given the small capacity growth of only 2%. These excellent results are a reflection of our continuous work on our cost savings initiatives. You can see the reliable delivery of our product with low unit cost continues to be one of our Company's main focus areas and core strengths.

In terms of operating results, consolidated operating earnings for the quarter came in at $77.2 million, representing an operating margin of 13.6%, a 4.3 percentage point expansion over the 9.2% achieved in the third quarter of 2015. It is important to highlight that these results include the significant negative effect of realized fuel hedge losses. Excluding these realized hedge losses, our operating margin for the quarter would have been 17.5%, closer to our recent historical average, excluding hedges, of 19%.

In terms of net results, net earnings for the quarter came in at $74 million or earnings per share of $1.75. When excluding extraordinary items, mainly the unrealized fuel hedge mark-to-market gain of $19.2 million, underlying net income for the quarter came in at $55.3 million or earnings per share of $1.30 compared to last year's third quarter underlying net income of $37.4 million or adjusted earnings per share of $0.85.

With respect to fuel hedges, we haven't taken any new positions since July of 2015. For the third quarter, we had coverage for 32% of our projected volume, which resulted in a realized loss of $22.2 million. For the fourth quarter of 2016, we have hedged 35% of the projected volume, mainly using jet fuel swaps at an average equivalent price of $2.40 per gallon. So, we continue to expect significant negative fuel hedge effects for the fourth quarter of this year. For 2017, our position remains unchanged with less than 6% of the projected volume covering jet fuel swaps with an average price per gallon of $1.80.

Turning now to the balance sheet; assets totaled $3.8 billion at the end of the quarter. Owners' equity totaled approximately $1.8 billion, debt plus capitalized leases totaled $2.1 billion, and our adjusted net debt to EBITDA ratio improved to 2.6 times, which continues to be the lowest in our peer group. In terms of debt, we closed the quarter having reduced our bank debt to approximately $1.2 billion, about 60% of which is fixed rate with a blended rate including fixed and floating-rate debt of approximately 2.7%.

Looking at cash, short and long-term investments, we closed the quarter with $773 million, which represents approximately 36% of last 12 months' earnings. In terms of fleet, we've already taken delivery of the one new Boeing 737-800 we had scheduled for the year, and returned two Embraer 190s to end the year with a fleet of 99 aircraft; 64 737-800s; 14 737-700s; and 21 Embraer 190s, a decrease of one aircraft compared to the fleet at the end of 2015. Finally, as per our Company policy on December 15, we will pay our third quarter dividend in the amount of $0.51 per share to shareholders of record as of November 30, 2016.

Going back to our results and to recap, the region is seeing a healthier travel demand environment. We continued 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 a changing demand environment and we continue having one of the strongest balance sheets 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're updating our 2016 full year guidance as follows. We're narrowing our capacity growth in terms of ASMs to plus or minus 1.5%. We're increasing our load factor to plus or minus 80%. We're increasing our RASM guidance to plus or minus $0.10. We're maintaining our CASM ex-fuel guidance of plus or minus $0.064. We're also increasing our fuel price assumption for the year to an effective price per gallon of $1.83, including into-plane and net of hedges. And with respect to our operating margin, we are narrowing our guidance to a range of 12% to 13%.

Today, we're also providing preliminary guidance for 2017, based on our operational plan and expectations for air travel demand. Keep in mind that our visibility as of now is still very limited. Our capacity in terms of ASMs is expected to grow by approximately 5% and operating margin for full-year 2017 is expected to be in the range of 15% to 17%. This assuming an effective price per gallon including into-plane and net of hedges of approximately $1.80.

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

(Operator Instructions) Savi Syth, Raymond James.

At the Investor Day, you outlined cost initiatives and I was wondering if you could talk about maybe how much of that roughly $50 million you're targeting was achieved in 2016 and maybe what that progression might be in 2017-2018?

It's Jose here. Our projection is for approximately half of the savings to be completed during 2016, and then a run rate of $50 million worth of savings around that during 2017.

And then on Wingo, if I may ask, you shared a lot of detail, but I was wondering, specifically, what characteristics were in the decision process on which route to introduce Wingo on. And then also, just your thinking behind the 737-700 given that maybe the 800 has a closer, higher density dynamic to some of the other LCCs in the regions.

So, this is Pedro, Savi. So, a couple things. The route network is very similar, 95% of what we have today -- what Copa Colombia or AeroRepublica is operating today. So, we are introducing a different model to a network we are already operating. We know the market. We know where are the passengers. We are in a way over-serving them with a high-cost product and a high-cost operation in what are mostly low-yield leisure markets. So, Wingo is going to solve that problem for the network we have today. So, we see it at relatively low risk and we can deliver the low cost by changing the model and knowing that we come from a low-cost operating base.

In terms of the aircraft, yes, the 800 has a higher density and thus a lower per seat cost, but it all depends on your load factor. The 700s have lower trip cost. These are 700s that are pretty much paid for. So, these are low-cost 700s for us. And given our forecasted load factors, we do much better financially with a 700 and higher load factors than an 800 and lower load factors.

Helane Becker, Cowen.

So, here's a couple of questions for you. What's the CASM advantage of Wingo versus Copa?

It's Pedro again. The CASM advantage will come from direct distribution, a higher density on the aircraft and a much lower on-board service cost. Those are probably the three, more significant cost differences versus Copa. It's also point-to-point, not connections, so there's also less complexity there that lower the cost. The network compared to all of Copa is different, so making a CASM comparison one against the other would not be fair. But what we have compared are the new Wingo CASM to any other LCC in the region Wingo is going to be operating, and the CASM is the same or better.

And then just a follow-up on the density. Do the aircraft already have that higher density or do you have to actually put them through a modification program and what would the cost of that be?

Yes, they were put through a modification program and we did that in-house including the painting, and the cost was mainly the purchase of new seats. We bought new HAECO high density seats and that's the difference. So it's not much more than $3 million the cost of reconfiguring those four aircrafts, including everything, not only the seats, but the downtime, the work et cetera. And that's CapEx of course.

And then my other question is with respect to the fleet for 2017. What do you -- how many aircrafts do you contemplate having in the fleet by the end of next year -- by year-end 2017?

So Helane, Jose here. Just kind of to summarize where we will end in 2016. We'll end with 99 aircraft this year. So next year, we have two deliveries, two 737 aircraft that are coming in, 737-800s and one Embraer operating lease that is expiring next year. So, we'll end the year with a fleet of 100 aircraft.

And does that include, I think you have four 737s in Wingo?

Yes, that's including, the 100 airplane count includes the four aircraft in Wingo.

And then just one last follow-up on the operating margin, Jose. You said 15% to 17%, but in the third quarter, ex the hedges, you would be already over 17%. So is part of the lower -- I would think you would be maybe in a 16% to 18% range for next year. So is part of the lower end of the range due to higher jet fuel costs? Is that how I'm thinking about that?

Yes, there are a couple aspects there. You're right Helane, let me just start by saying that the guidance that we're providing for next year is still a preliminary guidance. From your aspect indeed fuel is considerably higher than on our ex-fuel hedges basis than what it was in 2016. Then the other thing, when you compare Q3 of this year, Q3 is seasonally the strongest quarter of the year, and we're providing a full year average for next year as well.

Okay, fair enough. Thank you. And Pedro, welcome back. Glad you're feeling better.

I'm doing great. Thank you.

(Operator Instructions) Mike Linenberg, Deutsche Bank.

Hey, everyone, it's actually Richa Talwar in for Mike. So first, sorry to beat a dead horse here, but on the Wingo operation, how large do you expect the business line to be? When do you expect it to be a profitable contributor to the business and how long do you think it'll take for that to fully mature?

Yes, well, the interesting thing with Wingo is that it starts off something, a base that already exists. So we need to shift passengers and it's direct distribution and it's using a different code, but it's not starting out of zero, out of nowhere. And the other interesting thing is that, it doesn't really need to be profitable, although of course, the plan is that it's going to be profitable, but it doesn't need to be profitable to be successful. Because if we reduce Copa Colombia, a domestic and off-hub losses, then that's a gain for Copa Holdings.

So it only needs to be to do better than the current domestic and off-hub operation of Copa Colombia to be a positive contributor. And we think that by the second half of 2017 that will be the case. Wingo will be contributing in a positive way to Copa Holdings. The immediate plan is those four 700s kind of fixing the current network that I've just mentioned. And we'll take it from there as the opportunities come, and Wingo develops and does well, we'll see what are the next steps. So right now, we're focused on replacing the network with those four aircraft.

And then a second one on the Connect mileage plan. At your Investor Day, you suggested the loyalty plan should help boost Company margins by an incremental 1 percentage point. Curious if that's baked into your 2017 outlook or do you really expect that tailwind to be fully realized in 2018?

Yes, Richa, this is Jose here. We see that more of anything in terms of accounting profit that will most likely come in during the latter part of 2017 and maybe more of a 2018 accretion.

And then, if I could just on, one more for fun, how do you expect the outcome of the US elections today, or last night rather, to impact your business or the country, if at all?

We're expecting no impact on our business, and that's all I want to comment.

Renato Salomone, Itau.

First question, with the 5% ASM growth guided for next year, can we assume that aircraft utilization will converge back to 11 hours a day?

Renato, this is Jose. Yes, indeed. The main source of growth in terms of -- or component of growth of the ASMs is aircraft utilization. There is also somewhat of a component related to gauge, but it's mostly aircraft utilization as you mentioned.

And a quick follow-up, on the 22% growth on reservations and sales, can you give us a bit more color on this growth, on this pressure here and what's -- if there is any one-offs and what's sustainable here?

I think it's a function of the increase in sales that we've had going forward. And so, I think it's certainly -- it's a function of kind of the recovering revenue environment that we're seeing, and at higher load factors as well. Indeed future bookings for the fourth quarter also are drive this line.

Pablo Barroso, Credit Suisse.

Just one quick question. On your preliminary guidance for 2017, you penciled 5% ASM growth. Can you provide a little more color on which market are you looking to add this capacity?

Pablo, this is Jose here again. It's mostly related to aircraft utilization and full year effect of flights that we started this year. I don't necessarily see that there is a big difference or a particular region where we are putting in more capacity than others.

Pablo Zaldivar, GBM.

Congratulations on your results. Could you give us an update on how are you seeing the competitive environment and in terms of your capacity deployment and demand in your main markets that would be Brazil, Colombia, and Venezuela?

This is Pedro, Pablo. So, in terms of competition, it's been stable as of late and we don't see that changing. So, the other airlines in our region are not adding a lot of capacity. There's not really -- it hasn't really changed much from what we were seeing already in the previous quarter. In terms of the two markets you mentioned; Colombia, it's improving -- it has been improving year-over-year and quarter-over-quarter in terms of yields and PRASM. So, that market is doing better year. In Venezuela, we've seen a little bit of improvement quarter-over-quarter but it's worse year-over-year. It is actually much worse year-over-year, but it's not getting worse, if at all it is getting slightly better, but still below the year before.

And another question, just quickly. For this year, you have an average load factor guidance of roughly 80%. Do you believe this is a sustainable level going forward?

Pablo, this is Jose here. We've been very active in capacity. I think that the reasoning behind the 80% load factor is a function of how we've managed capacity and how we've approached the environment and ultimately you know the important item that we optimize for is unit revenues of PRASM. So, going forward, I think we'll make the best out of the circumstances, but the true aspect that we optimize for us is unit revenues in our business.

Hunter Keay, Wolfe Research.

Would you mind deconstructing the margin guide a little bit, the components of RASM and CASM? And maybe within RASM, load and yield, if you feel like at all doing that? And maybe to answer my own question a little bit here in advance, but is the rationale for not giving a RASM guide a function of you believing that oil prices are volatile and if they go up, you'll have a pretty good ability to pass it through pretty much dollar for dollar? Is that the right way of thinking about why the RASM guide wasn't included today?

I think that Hunter, it's a function of visibility in the future and indeed fuel has shifted across the last year. And so we felt that it was better to issue those figures when we affirm our guidance for the full year in February. I'd say that indeed, ultimately, the way that we approach this and we feel that with the economies that we operate in, the currencies will appreciate and the currency or the economies will do well, once the fuel price were to increase. But there is a lag in that, so we didn't want to necessarily box ourselves into a unit revenue figure versus oil or versus other details such as load factor. So, this is the way that we're approaching it, again preliminarily, but we are very confident in the way that we see 2017 right now.

On the 5% capacity guide, has that come up, or was there a baseline plan that was something that was much lower? And would you care to bracket in how high or low that could go if things get better or worse? And then last part of the question is, if you guys get back to where you want to be in terms of like the high-teens margins, what's a good long-term capacity growth for you guys, like in 2019 and beyond?

I think that the 5% I think it is what is, it is around there. I think that it's -- we've been I think very adept at gauging capacity in a very short-term basis depending on how the markets perform. But I -- we are I think confident or comfortable with the 5% for now. In terms of the margins going forward, I'd say that, yes, we were comfortable with the high-teens margins in 2018. The aircraft growth that we have -- savings, I think, for about, upwards of about six aircraft of growth. And ultimately I refer to what the kind of longer term estimates mentioned for the region, which is a sustained kind of growth rate for air travel in Latin America of between 6% and 7%. So it is -- I think that with that you can argue that growth in the low-double digits is not out of the question going forward.

Stephen Trent, Citi.

Pedro, also glad you are you feeling better. I was curious, looking at what we have seen in the region, there's been speculation about M&A here and there. I know on Copa's side, way back when you guys acquired AeroRepublica. And when you think about the long-term trajectory for Copa, do you kind of see equal probabilities that Copa buys a stake in another airline or is it self-acquired? Or are you not really thinking at all in terms of either potential outcome?

So, a few things. First, I think the most important is that our business model, it's been proven over time that's sustainable on its own. We are in the best geographic position. We have by far the best and strongest hub and we feel that with the partners we have we can continue as we are right now developing our business model without needing to merge or be acquired or anything. So, we are not in a position similar to other carriers that need to look for a partner to strengthen their balance sheet; we have a very strong balance sheet, or because they need a strategic partner to move forward their business.

We are not in that position. We can go at it -- continue going at it the way we have done it in the past. So, we are in a very comfortable position in that sense. But we will never say never -- we will never say never and we are always going to look at interesting opportunity that might present along the way, and that's something we are always going to be open to. But, again, we have the comfort of not needing to do anything to be successful going forward.

And sticking with the rule about one follow-up, and not to beat a dead horse here, and a dumb question from my part. When I think about Wingo, is this at least somewhat analogous, for example, to what Air France does with Transavia and Lufthansa with Germanwings? Is this kind of an opportunity for kind of incremental long-term economic profit? Is that how we should think about Wingo?

Slightly different and I can't say that I know the examples you mentioned well enough. I know of them but might not know them well enough. But I would say three things that are important in the Wingo case, and in no specific order. Number one is that Wingo can deliver [euro efficiency] cost because we have the efficiencies, we have the productivity. And we've always operated in a low cost manner except for the fact that we are full service, hub-and-spoke agency distribution, but Wingo is changing those things.

So, we can deliver the cost. Number two, it is very important is that we have no restrictions. We have full flexibility to do whatever we want with Wingo and not like some of the other airlines you've mentioned that have all kinds of limitations and restrictions from labor, et cetera. And number three is that we are reconverting an operation that we already have. So, we are not venturing out to try to reinvent the wheel. We are reconverting something that we have been operating for a while that we feel that Wingo can serve in a much more cost effective way.

Rogerio Araujo, UBS.

My question is a follow-up on yields. If you could mention -- you already talked about Colombia and Venezuela. If you could mention how Brazil was important for this recovery. And if you could compare a little bit Brazil with Columbia, which one was better in terms of recovery and which one helped more your yield recovering in the third quarter?

And also if we consider flat yields seasonally adjusted going forward, we already can get into the bottom of our guidance for 2017. So, we don't need any further improvement in yields for Copa to be able to deliver its guidance in our calculations. My question is also what do you expect in terms of yields going forward if this is, is fuel recovery to come and in this case if you can get upside risks to your guidance in terms of yields?

Yes, Rogerio, this is Jose. I'd say Brazil has -- we've seen kind of Brazil flattening out over the last quarter and a half. I'd say the third quarter from a yield perspective on a year-over-year basis, it was slightly up, which is a good indication. And it was slightly ahead of Colombia, but I think both of them ultimately performed reasonably well, or at least recovered somewhat versus what we had seen in the quarter or the same third quarter a year ago. And in terms of going forward, I'd say that we feel that there could be still some upside in the yield environment in the South American markets. And I think that Brazil still has some upside for the end of the year and for the beginning of next year, which for what we have a visibility.

If you look at your bookings right now, is it going to be a good high season, especially for Brazil in December and January?

Yes, I'll look at it from a standpoint of kind of the entire network. I think that you can expect the traffic in the network could be in line with recent traffic trends that we've shown.

Dan McKenzie, Buckingham Research.

Jose, setting aside Brazil and Colombia, just international inbound bookings to Panama in general appear pretty strong. And so my question here really is referencing alliance and partner revenue. I guess, first, what percent of total revenue is this segment? And then secondly, how would you characterize this part of the business and/or what might be driving it?

Dan, so I won't go into necessarily the detail of how much we have in interline revenue, but I'd say that it has a level of importance to the hub, especially the growth that we've seen from kind of European traffic into Panama, that connects via Panama beyond to other destinations in the region. That has been very good for us. We've seen quite a bit of growth this year, for example, Lufthansa started flying and I think that's been a very successful launch and we have other such as KLM and Air France and Iberia also operating in Panama.

So, I think that's the main source of what we see as interline revenue sources for us, and again it expresses the power of the hub that a city as small as Panama has such significant intercontinental service. And I'd say that about half of -- by the way, Dan, about half of the traffic that these carriers bring into Panama flows beyond into the Copa network.

And then, Pedro, I'm wondering if you can update us on return of capital priorities from here. I'm just wondering if the stock buyback program really has been exhausted at this point, and how should we think about buybacks going forward?

I'm going to let Jose answer that one.

So, Dan, as you know, the Board about a year-and-a-half ago announced a buyback program, of which we have executed about half. I think during this year, especially during the second and third quarter, we've been mostly focused in ensuring that our cash balance remains strong and the strength of the balance sheet remains as such, and that's been the main focus right now. Of course, without the other main source of capital return to shareholders is our 40% dividend policy that we actually updated or adjusted this year. And I think that that's a leading source of value for a shareholder of the Company.

And then one final housecleaning, revenue management technology, still on track to be implemented second half of 2017? And is there a risk that that deployment could potentially be delayed?

We are not expecting revenue management -- it is Pedro, but it's our passenger reservation and services system, or CSS technology. So, yes, that is on track for the second half of 2017. It should be implemented by the fourth quarter of next year. Delays are always a risk but since in this opportunity, what we are doing is upgrading our current systems, I think the risk of delay is much lower than if we were changing system. So, we are pretty confident that it should be online by the end of next year.

Duane Pfennigwerth, Evercore ISI.

Just going back to Wingo for a second. Is it a separate subsidiary or a separate brand? What is your ownership percentage of it and how will the results be reported into your consolidated reports?

It can be kind of confusing. It's a separate brand. Our Colombian subsidiary and our Colombian operating certificate is AeroRepublica, which we re-branded to Copa Airlines Colombia, and in a way, we're re-branding again to Wingo. But it's our same operating certificate, it's the same operating team, group of pilots, mechanics et cetera, where we have to reconfigure the four airplanes we have mentioned. But it's an ongoing operation which Copa Holdings owns 100%, and it will continue being under the Copa Holdings reporting.

Okay, so those are fully consolidated results and can you tell us what the margins look like or have looked like in Colombia relative to the system average?

So, of course, again, it's all consolidated in Copa Holdings. And what we're changing with Wingo, it's the domestic, with is basically a few leisure routes because we have reduced domestic to almost nothing as we know. So as the few remaining domestic leisure routes and the off-hub international routes out of Bogota do not touch our Panama hub, so that's what being reconverted to Wingo. The Colombia to hub operation remains under Copa Airline brand. But the network that I just alluded to has been returning losses, has been losing for the past number of years and Wingo looks to turn that around.

You used to report that back in the day, you might consider doing that again. It will help us understand the margin improvement potential a little bit better. And then just lastly, I don't know if you'd be willing to do this, but could you break out RASM growth by month in the third quarter? How did that trend in July, August and September and I guess, October is closed, what does that look like in the month of October?

I'll let Jose not answer that one.

(Laughter) I'd say Duane, no I think, like the quarter in general I think performed in general better than the quarter last year, so I'd leave at that. I'd say that we didn't necessarily see a particular month spike up. I think it was a uniform sort of trend in the same way. So, again just driven by the load factor more than anything.

Ravi Jain, HSBC.

I had a quick question on Costa Rica. I would love to hear your thoughts on Volaris foray into Costa Rica and their plans to make it a slightly larger operation. Just your thoughts on a longer term basis of how it impacts your network or your competition in Central America for you?

It is Pedro. So, to be honest, I don't really know much about their plans. So, there's not much I can comment, at least not specifically about what they're planning to do because I don't really know, we don't really know down here. But what I can tell you is that the intra-Central America market is very thin, it's very small, and it has plenty of capacity. We serve it with multiple daily frequencies and relatively low load factors. So, I don't think there is a lot of room there for new operators.

The other important matter is that it is a region with very high departure taxes -- very high ticket and departure taxes. So, in a one hour flight, it's going to have over $100 just in taxes. And what that means is that it's very difficult to stimulate a market, very difficult to stimulate with low fares when you right off the bat your fares are at least $100 or above before you get a penny for yourself. So, very hard to stimulate. Now, if their plan is to serve Central America to the US, to North America, that's a whole different ballgame. That's a much larger market and we don't really compete in that market. So, we will not be affected.

Renata Stuhlberger, Goldman Sachs.

So, two questions from me. The first one is, could you please comment what is behind your very strong growth demand figures of 13% during the quarter? And my second question is, in the Copa Day, you provided a roadmap for margins to recover to the 20% level with expensive hedges would allow a 4 percentage points gain, better local economies than we read, as traffic and yield would allow another 2 percentage points gains to your long-term EBIT margin levels. So, from the new tentative guidance of 70%, can you please give us a breakdown of where the improvement is coming from in terms of jet fuel cost, yields, traffic? And that's it for me. Thank you.

It's Pedro, I'll take the second one and then I'll let Jose add more to it and then address your first question. When we show you that path to higher margins, which I again mentioned at the beginning of the call, that's all other things being equal. So when fuel price is a lot higher as we have guided to then some of those improvements are going to compensate for a higher fuel. And we're not going to be breaking them down, but in our guidance there is the fuel hedges coming off, and that's like 4 percentage points more or less. So that's coming off in 2017. So that's a big part of what's making the difference. And then some of the other initiatives are compensating for higher fuel prices. Assuming also including an assumption that the demand environment is going to continue strengthening as we've seen so far.

In terms of the traffic, I'd say there are couple of items. First, we have been very active in managing our network and managing our capacity that we deploy. So, it is not only the fact that we have reduced kind of our growth profile and been very forward in removing capacity that was not required, but also we've shifted around capacity throughout the network and been very smart about shifting ASMs in different parts to ensure that we take the capacity in the best way possible -- or the demand in the best way possible.

But having said that, there's also been some good performing markets in the last several months. I think some of the South American markets, as I mentioned earlier, that had not yet been performing and during the second quarter have been on the rebound. We see the Brazilian market, the Colombian market on a traffic basis certainly are seeing positive trends in the third quarter. So, we are seeing a little bit of that but it's also related to the actions -- the proactive actions that we have made with the capacity in the network.

Leandro Fontanesi, Bradesco.

Just with regards to competition, I would like to know if you consider any change in the competitive landscape for next year in your 2017 guidance? So, like it was mentioned before, we see some airlines wanting to expand to Central America and also one group wanting to explore Colombia. So, just wanting to understand if you consider that change in your guidance?

The only thing we consider in our guidance is what has been announced -- officially announced. We do not consider anything that is maybe speculation or that we don't know for sure. So, that's all. And it's not really significant what has been announced in terms of changes from competitors or new competition for 2017.

And just a second question, would you consider reconfigurating more of your aircraft for Wingo if you do see a change in competitive landscape or meaning more low cost airlines or ultra-low cost airlines come into your market?

Yes, we would for sure, if we see there is an opportunity. We won't do it just because there's another low cost airline in our market. We will do it if we see an opportunity for Wingo to expand into new market. It's not our focus right now, but, yes, we have the aircraft and we have the mean. And with Wingo, we've learned a lot and we're learning a lot about the ULCC model. So, yes, that's something we will always consider.

Hunter Keay, Wolfe Research.

Thanks for the follow-up. Pedro, you classified the SHARES PSS as an upgrade. I know at the Analyst Day you said that the SabreSonic PSS was suspended. Is that officially dead now or is that still in a suspended state? Are you guys are going to just push forward with the upgrades to the Sabre platform permanently?

No, no. It's suspended. Nothing has changed from the Investor Day. It's suspended, but what we're doing with HPE at the end of next year, which has already started of course, what would be functional by the end of -- it is an upgrade to the system we have today. So, it is not a change of system, no data migration or any of that. And it is an upgrade that's going to give us everything we need in terms of being able to sell ancillaries and some of other things we talked about. But the Sabre implementation has been postponed a few years into the future.

So, just to be clear, five years down the road, are you going to be running two PSS platforms or are you going to be completely cut over to Sabre at this point? Or is it just a upgrade or like a bridge solution?

Yes, you can look at this upgrade as a bridge solution. And with time, we'll see what happens, but it will be a bridge solution at worst. I mean, we will never have two different systems.

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

Thank you all. This concludes our third quarter earnings call. Thanks for your time and continued support. And good luck with the new government.

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