Copa Holdings SA (CPA) 2016 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Copa Holdings' fourth quarter and full year earnings call. 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 February 16, 2017.

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

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

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

In addition, our discussion will contain forward-looking statements, not limited to historical facts, that reflect the Company's current beliefs, expectations, and/or intentions regarding future events and results. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially and are based on assumptions that are subject to change. Many of these risks and uncertainties are discussed in our annual report filed with the SEC.

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

Thank you, Raul. Good morning to all and thank you for participating in our fourth quarter and full-year 2016 earnings call. As always, I first want to congratulate all of our co-workers for their efforts during the quarter and throughout the year. Their dedication and commitment keeps us at the forefront of Latin American aviation.

As you might recall, during our last call we talked about seeing a clear improvement in the demand environment and stronger traffic patterns, although still at lower fares. We also mentioned that with more stable currencies, it was probably only a matter of time until we started seeing some strengthening in yields.

That said, we're happy to report that during the fourth quarter we were able to deliver higher load factors and year over year and quarter over quarter yield improvement, resulting in a significant unit revenue expansion. We're optimistic this trend will continue into 2017. In fact, yesterday we released the January traffic figures which show a very strong 83.7% load factor, an increase of 3.8 percentage points year over year.

Among our main highlights for the quarter, traffic increased 11.3% year over year and our load factor came in at 81.6%, almost 7 percentage points higher than Q4 2015. Yields increased 1.3% year over year or almost 5% when adjusting for an increase in length of haul. Our higher load factor and higher yields resulted in unit revenues of $0.107, an increase of almost 11% year over year.

Due mainly to non-cash accounting adjustment, which Jose will explain in detail, our ex-fuel unit cost increased to $0.069 for the quarter. As a result, our operating margin came in at 11.8% for the quarter, up close to 5 percentage points from the fourth quarter of 2015. Also, keep in mind our operating results include considerable realized fuel hedge losses. Excluding the impact of these hedges, most of which expired in the fourth quarter, our operating margin would have come in above 15%, even after the non-cash accounting adjustments mentioned before. On the operational front, Copa Airlines delivered on-time performance of 86.4% and a completion factor of 99.7%.

Now, turning to our main highlights for the full-year 2016, we reached an operating margin of 12.4% for the year, which excluding the close to $94 million in realized fuel hedge losses, would have resulted in an operating margin of close to 17%. Unit revenues came in 2.7% lower year over year, but higher than expected at $0.101. More importantly, we've seen consistent and consecutive year over year improvement in unit revenues during the second half of 2016.

CASM ex-fuel stayed flat year over year at $0.064, amongst the lowest for a full service airline. We strengthened our network by adding three new destinations, Chiclayo in Peru, Rosario in Argentina and Holguin in Cuba, closing the year with 73 destinations in 31 countries, by far the most extensive and convenient intra-Latin America network.

We took delivery of one new Boeing 737-800 and returned two Embraer-190, ending the year with 99 aircraft, one less than at the end of 2015. And we launched several important projects that should contribute significantly to our results over the next couple of years, including upgrading our reservation system, which will eventually enable further ancillary opportunities; migrating to a new unified MRO solution, which will allow us to more efficiently manage our maintenance programs for both the Boeing and Embraer fleet; expanding our maintenance facilities in Panama to increase our capacity to do more work in-house at a lower cost; and a Company-wide project to realize $50 million in recurring savings, about half of which were already achieved in 2016.

We also launched Wingo, our low fare, low cost operation out of Colombia, and are happy to report that Wingo has had a great market reception, allowing us to tap into a new demand segment.

On the operational front, our team delivered excellent numbers, with on-time performance coming in at 88.4% and a flight completion factor of 99.8%, placing us once again amongst the best and most reliable airlines in the industry. In fact just a few weeks ago, we were recognized by OAG for the second consecutive year as the second most on-time airline in the world and by FlightStats for the fourth consecutive year as the most on-time airline in Latin America.

We also won SkyTrax's World Airline Award for best airline, best staff and best regional airline in our region and we were recognized by GE and CFM International for operational excellence, leading the Americas for the past five years in reliability of our engine type on the Boeing fleet.

In summary, we once again delivered strong financial results while being recognized for our world-class service and on-time performance. None of these achievements would have been possible without the professionalism, commitment and excellence of our entire team. I take this opportunity to express my admiration and thank them once again.

Turning now to 2017, we're seeing a continuation of strengthening demand patterns into the first quarter and expect the air travel demand environment to continue improving during the year. As a result, we're planning for fewer seasonal cancellations, which we expect will result in higher utilization of our fleet and a 6% year-over-year capacity growth.

In terms of fleet, we expect to receive two 737-800s during the first quarter and return one leased Embraer-190 in the second half of the year, ending the year with 100 aircraft.

To recap, we expect to continue seeing a recovery and improving trends in the demand environment during 2017 as we have been able to maintain higher load factors and have started seeing an improvement in yields. We will maintain a very proactive, comprehensive and disciplined approach to capacity. Our team continues to deliver world-class operational performance while achieving industry leading unit cost.

We're focused on executing several cost and revenue initiatives that are aimed at increasing our margins. And lastly, we're confident than ever in our model business 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 to over to Jose, who will go over our financial results for the fourth quarter in more detail.

Thank you, Pedro. Good morning, everyone, and thanks again for joining us. First and foremost, as always, let me begin by joining Pedro in congratulating the entire team for all their efforts and achievements during 2016.

Among our highlights for the year, we maintained flat unit cost while growing capacity only 1.5%. We increased our load factor significantly, especially in the second half of the year, resulting in our highest yearly load factor ever of 80.4%. And during the fourth quarter, our unit revenues increased close to 11% year over year.

Reported net income for full-year 2016 came in at $339.8 million, which translates to earnings per share of $8.02, and an operating margin of 12.4% compared to 11.8% for 2015. These results include significant realized fuel hedge losses of close to $94 million for 2016 and $95.2 million for 2015. Excluding these realized fuel hedge loses, our operating margin would have been 16.7% in 2016 and 16.1% in 2015.

Excluding special items, mainly the fuel hedge mark-to-market gain of $111.6 million, underlying net income came in at $206.7 million or adjusted earnings per share of $4.88 compared to $226 million in 2015 or adjusted earnings per share of $5.15.

Turning now to our fourth quarter results, we grew capacity by 2% year over year while revenue passenger miles increased 11.3% year over year, which resulted in a consolidated load factor of 81.6%, a 6.8 percentage point increase versus Q4 of 2015. Furthermore, passenger yields came in 1.3% higher year over year, which combined with a higher load factor resulted in a unit revenue increase of 10.7% from $0.097 in Q4 2015 to $0.107 in Q4 2016. Consolidated revenues increased almost 13% to over $601 million.

On the expense side, our fourth quarter operating expenses increased 7.4% year over year and our cost per available seat mile increased 5.3% to $0.095 from $0.09 in Q4 2015. The cost per available seat mile excluding fuel cost, ex-fuel CASM, increased 6.7% to $0.069. The higher ex-fuel CASM for the quarter was mainly driven by a non-cash accounting adjustment in depreciation as we adjusted the fleet's useful life assumption from 30 to 27 years. It is important to mention that we recorded the entire 2016 adjustment in the fourth quarter, putting additional pressure on the quarter's unit cost figure. The adjustment was made to reflect our current assessment of the existing fleet given the new generation of aircraft entering the market in the coming years.

Of the $12 million charge, $9 million corresponds to depreciation expense for the first three quarters of the year, which reduced our fourth quarter earnings by more than $0.21 per share. There were also some increases in passenger revenue related costs, mostly corresponding to carrying higher load factors.

Consolidated operating earnings for the fourth quarter came in at $71.1 million, resulting in an operating margin of 11.8% compared to 7.3% for the fourth quarter of 2015. Excluding the effect of realized fuel hedges, our operating margins would have been 15.4% for Q4 2016 and 11.9% for Q4 2015.

In terms of net results, net earnings for the quarter came in at $95.8 million or earnings per share of $2.26. When excluding extraordinary items, mainly the unrealized fuel hedge mark-to-market gain of $24.3 million, underlying net income for the quarter came in at $60 million or earnings per share of $1.42 compared to last year's fourth quarter underlying net income of $41.5 million or adjusted earnings per share of $0.96.

If we exclude the $9 million charge related to the first three quarters worth of incremental aircraft depreciation, our earnings per share would have come in close to $1.63, an improvement of almost 70% over the fourth quarter of 2015.

Looking at non-operating income and expense, fourth quarter generated a net non-operating income of $27.8 million, mainly consisting of a $24.3 million fuel hedge mark-to-market gain. With respect to fuel hedges, our position has remained unchanged since July of 2015. For 2017, we have about 5% of our projected volume covered with jet fuel swaps at an average of $1.80 per gallon.

Turning to the balance sheet, we ended the year with a very strong financial position as assets totaled $3.8 billion or an increase of over $130 million versus the end of 2015. Owners' equity totaled approximately $1.85 billion, debt plus capitalized leases totaled approximately $2 billion, and our adjusted net debt-to-EBITDA ratio came in at a very strong 2.2 times, by far the lowest in our peer group.

In terms of debt, we closed the year with approximately $1.2 billion in bank debt, about 60% of which is fixed rate, with a blended rate, including fixed and floating-rate debt of approximately 2.7%.

In regards to cash, short- and long-term investments, we closed the year with over $815 million, which represents approximately 37% of last 12 months revenues.

Turning now to our fleet, during the first quarter of 2017 we expect to receive two owned 737-800s and return one Embraer-190 upon its lease expiration in the third quarter for a net increase of one aircraft for the year.

Finally, I'm pleased to announce that our Board of Directors decided to maintain the same dividend payout as in 2016, slightly above the corresponding dividend amount according to our dividend policy of 40% of prior year's underlying net income. As a result, on March 15th, we will payout our first quarterly dividend in the amount of $0.51 per share to shareholder of record as of February 28, 2017.

So going back to our results and to summarize, demand for air travel in our region strengthened during the latter part of 2016 and is expected to continue improving during 2017. We continue to proactively manage capacity in an effort to improve unit revenues while selectively capturing market opportunities. We continue looking for efficiencies in order to reduce our unit cost. We have implemented a series of revenue and cost initiatives that should contribute to our results during the coming years. We have one of the strongest balance sheets in the industry and we continue to return value to our shareholders.

Today we're also providing guidance for 2017 based on our operating plan and expectation for air travel for the year. Keep in mind that our visibility for the full year is still limited. We're increasing our capacity growth in terms of ASMs to plus or minus 6% based mostly on increased aircraft utilization and we're maintaining our operating margin range of 15% to 17%.

Our 2017 full-year guidance is based on the following assumptions, load factor of plus or minus 80%, RASM of plus or minus $0.104, CASM ex-fuel of plus or minus $0.064 and an effective fuel price per gallon including into-plane and net of hedges of approximately $1.80.

Thank you. And with that, we open the call to some questions.

(Operator Instructions) Josh Milberg, Morgan Stanley.

The first question I had relates to your 2017 guidance. One factor that you had highlighted in the past is enabling last year's big improvement in the load factor with a lower ASM growth and now you're expecting to be able to stay at the 80% level or growing capacity at a faster pace. So I was just hoping you could comment further on your thinking around that. I realize that the January number was quite strong.

Yes. This is Pedro. So the key thing with our -- the load factor growth or the load factor that we are guiding to is that it's mostly putting back low season cuts we had in 2016. So it's aircraft utilization. It's not new routes. It's not new market. It's not even -- there will be a few, but it's not mostly new frequencies in current markets. So it's just less low season reductions given the strengthening of our market.

So it's a lot more predictable and also it's kind of a new normal for us, the higher load factors, as we saw during the fourth quarter and even the third quarter of last year.

Okay, Pedro. Yes, that's very clear. Then -- I mean this is a somewhat related question and you answered in part just now. But my second question is if you could just give a little bit of additional color on how you see the distribution of the added capacity this year from a country standpoint and I was wondering if you could eventually end up adding back some or a significant amount of capacity to Brazil just with a better economy in the country and also the substantial strengthening of the currency that we've seen in recent weeks.

Right. So it's spread evenly I would say. Well, maybe, it's not exactly evenly, but since it's adding back capacity -- but again it's capacity -- it's mostly low season cuts more than year-round capacity. So in a July or December month, we usually fly close to full capacity and we were very aggressive cutting back during last year in lower season months like, let's say, a September or an October. So we're adding some of that back and it's in many market. It's all over the place.

However, answering your specific Brazil question, we have been adding a little bit of capacity back in Brazil, but not near what we had before. So we're staying very rational. We're not really growing in terms of aircraft, so I think that's an important point. We will have this year the same fleet we had in 2015. So it's not like we can go crazy with capacity. But we put a little bit more capacity in Brazil, rounding up frequency. And again, most of that would be low season cuts that we were not planning to make this year.

Okay, that's great. Thank you very much.

Thanks.

Conor Cunningham, Cowen and Company.

It's actually Conor Cunningham in for Helane. Just a little bit more on the capacity side. I don't think the market like would fault you guys for pushing capacity growth given the improved demand environment. That's said, the industry as a whole has once again began to push capacity growth and with growth ramping throughout the year. What gives you confidence that you'll see year on year gains in unit revenue in the second half given your growth and the industry growth overall?

Well, again, we are not growing capacity that much except for again adding frequencies or not cutting as many flights because we're seeing stronger demand patterns, so we don't see a reason to forecast the same number of flights that were reduced last year. So that's one thing. So that's a lot more predictable for us.

Also, in our core market, we're not seeing the capacity adds that you might be seeing overall in other markets. So there have been a lot of adds, let's say, from the US to the Caribbean to Canada also through the Caribbean including Cuba of course, some interest -- South America adds. But overall in our market, we're not seeing that much additional capacity and we're not contributing to that either because we're staying very rational at least this year.

Okay, great. And so just a follow-up on that. When you think about capacity growth, is it more about like a unit revenue metric that you look at or are you looking more towards like the margin performance of the overall route?

I think that it's a network business, so we ensure that there is an impact to the entire network. But the one thing I would say, Conor, is that -- to add to what Pedro just mentioned is that at least for the first quarter we are seeing positive unit revenue trends in the region on a year-over-year basis. So we're encouraged by the performance that we're seeing, especially given the fact that we're not seeing an incremental amount of capacity out there right now. But so far from where we have visibility, we're seeing positive trends in terms of unit revenues in the region.

Okay, great. And then just on your hedge position, I know you guys haven't had it in quite some time, but you have 5% of your jet fuel hedged this year. I would imagine that that's front-end loaded in 2017 and then I would imagine you're un-hedged in the back half of the year. Is that fair to say?

Well, actually, Conor, this is basically spread out evenly throughout the year.

Okay.

So you can assume that the 5% is essentially flat for the year.

Okay.

And I should add that the potential hedge losses from that 5% are not material, are minimal.

Yes. Okay. And then -- so are you comfortable -- like -- so is there any hedges put in place for 2018, and if not, are you comfortable saying you're done hedging jet fuel at this point?

No, we don't have any positions in 2018 and we haven't really taken any new hedging positions since July of 2015. So for the time being we're really not hedging as such.

Great. Thanks, guys.

Yes.

Yes.

Matt Roberts, Raymond James.

This is Matt Roberts on for Savi actually. Kind of a macro based question here, could you just talk about demand and pricing trends in specific regions or countries throughout Latin America as well as peak versus off-peak?

Okay, so it's Pedro here. So what we're seeing right now, I mean overall I don't think there's one market that's much different to the rest. So I think this is the same for most markets at least for our main market. We're seeing stronger demand in our market, so we're expecting better unit revenues or improving unit revenues is what we saw last year.

What we saw last year for the first half of the year, the demand trend improved and the negative variance year over year were reduced. So it got better as the year went by and towards the second half of the year we actually saw improvement in our unit revenue -- I mean positive improvement always in our unit revenues and positive yields compared to the previous quarter over the end of the year. And we see that trend continuing in 2017. So we're seeing strengthening year over year yields and therefore PRASM numbers with stronger load factors. And that's pretty much the case in every one of our main markets.

Yes, Matt, just to add to that, indeed there's -- I would say that there hasn't been any particular region that is driving. I think the entire network seems to be responding well. And so we're seeing essentially increases in unit revenues throughout the network on a year-over-year basis for Q1.

Okay, great. That's good to know. Thank you. And then just quickly, as we think about costs moving into 2017, kind of what the cadence of that would look like and are there any factors to consider, for example, more lease return costs or anything else that we should consider? Thank you for taking the questions.

Yes. So the -- in general, the cost ex-fuel CASM for 2017 are flat versus 2016. We're guiding to a $0.064 CASM ex-fuel. And there isn't really anything in particular in terms of lease returns. I think that our 2017 number of aircraft that we're returning is lower than what we had in 2016. So that will come down somewhat, but it's not going to be significant in the overall picture. So I think in general terms we expect to have flat ex-fuel CASM for the year.

Great. Thank you very much.

Yes.

Hunter Keay, Wolfe Research.

So it looks like -- talking around your (inaudible) bill, it looks like you have a few routes and some fuel surcharges on there. It's looks like -- maybe roughly speaking it's about 10% of the fare. So can you remind us what percent of your network allows for a fuel surcharge mechanism, and then within that, how much like discretion exists with how those surcharges are implemented?

So it's -- I don't know if we have the exact percentages with output. I would say that most routes, most markets allow for fuel surcharges. They are just a few exceptions to that rule. And at the end of the day, it's one final price that we work with. So there have been fuel surcharges in the past and many have stock and are there in the pricing, especially in times of higher fuels. But we compete on the basis of overall prices and our pricing people are looking at that, at the final number. So I don't think that we're going to be adding or reducing fuel surcharges in the foreseeable future and would still be competitive in terms of the final price.

Yes, that's very helpful. I get it. Thank you. And then in the 20th you guys said -- in May, last May, that you are expecting to reach an agreement with your pilots -- at least that's how I read it -- in late 2016. I don't think that happened. So I guess that's my first question, did it happen? And then sort of if not, where are you in that and are you in a position to provide maybe a potential impact to either CASM or margin? Thank you very much.

Okay. Yes -- no, we did not reach an agreement towards the end of 2016. As expected, it's taking a little bit longer. We're on the table as we speak and we hope to be done probably by May or June of this year, looking at kind of the timing and how long that takes. The numbers we're guiding to include any potential new contract with the pilots and we don't expect that to have a material effect on the overall performance or unit cost numbers of the Company.

Okay. Thanks, Pedro.

Thanks, Hunter.

Duane Pfennigwerth, Evercore.

I wonder if you would talk a little bit about Avianca, is that still potentially a live situation from Copa's perspective and how do you think a closer relationship -- or their closer relationship with United impacts you, if at all?

So I can only comment on what's public and I cannot comment on speculation or anything like that. So we can comment on what has been public that they reached some sort of an agreement with United over other alleged airlines that were supposed to be bidding for them. Again, we cannot confirm or deny that.

So a few comments. Number one is if the outcome is United over the other large US carrier, obviously United is a much better outcome for us. We have a very strong and long-lasting partnership with United Airlines, so we would rather have Avianca in a closer alliance with United than with someone else. Plus that will guarantee that Avianca stays with Star Alliance, something that we also see as positive.

In terms of how that could impact a potential Avianca-United deal -- and again, we haven't really read much about the details of a potential deal, so it's hard to comment on that. But a closer United-Avianca relationship should not have a negative impact on Copa. If at all, it will be positive.

We have our own very strong alliance with United. It was renewed last year. We already codeshare and have a relationship with Avianca through Star Alliance. So I think the end result should be positive to us, although again the caveat is that we have seen no details. So we cannot comment on facts, only on what we've read in the papers.

Thanks for those thoughts, Pedro. And then I apologize for this question, but we still see it in the P&L. How much of your Venezuela sales are you selling currently in the local currency and can you update us on where your cash in Venezuela stands?

Yes. And I have no problems with that question because Jose is going to answer it.

Duane, so there is -- really we're not selling in Venezuelan currency anymore. We've not been selling in bolivares since 2015 and we have zero bolivares right now in our balance sheet.

So why do we still see gains? I guess you had like 20 something million in gains. So why do we still see that?

So, yes, it's a translational effect because of the fact that we have a liability and that liability position in Venezuela is mostly driven by local airplane ticket taxes. So it's -- we're selling dollars, where we pay some taxes in the local currency. So that creates for some accounting adjustments at the end of each period. So it's specifically related to that.

What is the minimum requirement? So in other words, where would cash have to get to before you'd have to start disclosing it again?

We actually don't have any cash balances there, but we still have a set of mostly government related expenses that we have in the local currency. It's about $1.5 million a month. So therefore we're -- because of the fact that our cash balance there is depleted, we are in -- for these specific expenses and payments that we have to make local, we have to buy the currency just before we make the payment. But it isn't really that we're carrying any sort of balance whatsoever.

Okay, I can follow-up with you offline. I appreciate you taking those tricky questions. It's just we still see the gains and I'm not sure I understand that yet. But I do appreciate you guys taking the questions.

Absolutely.

Rogerio Araujo, UBS.

Congratulations for the results. I have two questions. First is on the low-cost carriers in Latin America. I want to know how Wingo's operation is going and if the growth expected for 2017 remains the same or if you are more optimistic after the launching of this low-cost subsidiary?

Also talking about low cost, I would like your opinion on Volaris in Central America. You are already competing in at least one route with them. If you expect them to keep growing in Central America and if this could affect Copa in this region? And if it's possible, if you could give us the breakdown for revenues, how much of revenues comes from the Central American to US market and if they could become another competitor in this market niche? But that's my first questions. Thank you.

Okay. This is Pedro here, Rogerio. So a few quick answers. Well, Wingo first. So Wingo has had a very strong beginning. However, we started Wingo during the very high Colombian season, December and January. So we knew that. We knew it was starting during high season, so we did not expect less than a strong start.

The projection is that Wingo -- are that Wingo will lose money in 2017. We do not expect Wingo to make money this year. And Wingo will remain with only four 737-700s, so we're not expecting to grow that either.

However, the goal also is for Wingo to lose less money than what Copa Colombia was losing in that same network. So it should be net positive for Copa Holdings, even though only slightly for this first year of 2017.

In terms of Volaris, our intra-Central America network, it's almost an insignificant percent of our total business and our total revenues. So we're going to be competing in some intra-Central America routes that are point to point routes, are not tied to our hub, and the impact will not be material to Copa. So obviously we will compete aggressively with lower fares.

And what is the future? I mean I cannot really comment on their business plans. I don't know enough of it. You mentioned the Central America to US market, we're not really big players in Central America to US, so that should not have a big impact on us if that's their focus. And intra-Central America, we think there's limited growth in those markets given that the airport taxes are very high. The distances are short and the markets are not huge. So that's kind of the situation. But I mean we only know what we see, what has happened up to now. We don't really know more than that.

Yes, that's very clear. Thank you for the answer. My second question is on the depreciation. You adjusted it in the 4Q. So my question is regarding the upcoming quarters. Can I think that the depreciation in the upcoming quarters is going to be lower than 4Q 2016, but is slightly above the previous quarter? Does it make sense? Thank you.

Yes, Rogerio, that's correct. I think that you can assume that on a quarter-to-quarter basis on Q1 2017 -- Q1 2017 versus Q1 2016, you have an increase of, all else being equal, of around $3 million on the depreciation expense. So, yes, the Q4 adjustment that we made was a catch-up that covered the entire year and that was equivalent to about $12 million for full-year 2016.

Thanks.

Okay, makes sense. Thank you very much. Congratulations again.

Thank you.

Ravi Jain, HSBC.

I had a couple of quick questions. One is a follow-up of the load factors. Now, the load factors now are considerably above your historical average. Do you actually see some scope of pushing a little bit of pricing maybe at the expense of a couple of percentage points? Do you see that over time?

And my second question is, could you give us an update on launch of the ancillary revenue initiatives and how do you see that panning out at this -- 2017 and in 2018? Thank you.

All right. Yes. It's Pedro here. So there could be a little bit of what you are saying. So there could be the case where we push pricing a little bit at the expense of load factors. So that could happen. However, I think we are in a new normal in terms of having load factors in the neighborhood of the 80% range versus before, where we were before between 75% and 76%.

So I think the 80s are a new normal, although, yes, we could be at 80% and not at 82% and push prices a little bit harder. So, yes, we will always try to maximize PRASM and I think our higher load factors are a result of that, of that focus on maximizing PRASM. And that's the opportunity we dealt with. Of course also a factor of growing much less for -- well, with 2017 will be three years in a row, so that has also had a very positive effect on load factors.

In terms of ancillary revenues, so we had talked about the second half of this year as we implemented new functionalities on our PSS system. And I think that's going to be probably a little bit more towards the beginning -- end of 2017, beginning of 2018. So I think we will be a little bit late or later in pushing some of those ancillary opportunities as deploying the new PSS functionality are going to take us a little bit longer.

Thank you. That's very helpful.

Thanks, Ravi.

Thank you.

Marcio Prado, Goldman Sachs.

In fact Marcio Prado here. Some follow-up questions. The first one is exactly on yields and RASM. Just want to get some further clarification on the guidance. If we analyze your yield and RASM, they have improved 15% to 16% sequentially since they bottomed in second Q 2016, but a $0.104 for us basically indicate almost flattish sequential gain in terms of yield. So just wanted to get further clarification if you already see additional yields and if you consider the RASM guidance as a conservative one? That will be one question.

The second one, a follow-up on the dollar-denominated or local currency-denominated ticket sale. You guys mentioned that in Venezuela all sales are dollar-denominated these days. Just wanted to -- if you guys could share with us like out of Copa's total revenues, what percentage would be denominated in local currencies and what percentage would be denominated directly in dollars? Thank you.

Okay, Marcio, I am going to answer the second question first, which is about half of our sales are denominated in dollars and the rest are in other currencies. So, yes. And then --

But they are all tagged to the dollar.

Yes, yes, priced in dollars.

So we price in dollars. We convert basically the same day at the currency exchange rate valid that day and then transfer out the funds. So it could be in a different currency, but they are really priced in dollars.

Right. And in terms of --

Clear, Pedro.

Yes. And in terms of our RASM for the year, indeed there is -- I think that the bump seems to be frontloaded because the recovery that occurred last year occurred in the second half of the year. So what we are guiding to essentially has an improvement in RASM, I would say, mid single-digit for the first half of the year related to the year-over-year recovery that we are seeing. And the second half is still too early in the year, but it does have a marginal improvement also on a year-over-year basis for the second half. And that is kind of the way that we are seeing it right now.

Thank you. Thank you, Jose. So I mean mid single-digit year over year for the first half even if that means that your sequential improvement -- as you mentioned, the sequential improvement that has been very strong in the second half would basically come to a pause, right, because in --

Again, it's early in the year and we will see how the year progresses. So -- and we will see how things look in the third quarter specifically so that we can determine how things go. So I think we will see how the future looks as we start getting close to the second half.

Thank you. Thank you, Jose.

Yes.

Mike Linenberg, Deutsche Bank.

I just have a couple, some of these are follow-ups. Jose, on the accounting, what was the catalyst to go from 30 to 27 years. And then going from 30 to 27 years, what was the -- what's the underlying residual value assumption, like what were you depreciating it down when it was 30 years versus what are you depreciating it down with respect to 27 years?

Mike, so yearly as per accounting standards you perform an analysis of what your depreciation assumptions are in the useful life of the aircraft. And just given the arrival of the 737 MAX next year, we saw that it was a good moment to do this given how the MAX fleet is coming in in the next several years. And in terms of the residual value assumption, for now we will maintain it unchanged at 15%.

15%? Okay. So that's helpful. Now, this is a question for Pedro. Pedro, you sit on the Board and maybe you can answer this. But you now have two United executives on your Board of Directors and I'm just curious within your charter is that permissible or do they have to have an equity ownership, I mean could we see a change there, just any thoughts on that again from being a Board Member?

Right. Yes, there are no restrictions to that fact obviously. Andrew Levy was a Board Member -- Andrew Levy was an Independent Board Member before he became United CFO. So you can say we discovered him first. And --

That's a good answer.

So he is no longer independent, but he is still a Board Member and we have a close relationship with him. John Gebo, the VP for Alliances, is also on our Board. They are great contributors. We have a close relationship with them.

So, no, there are no legal restrictions and it is something that we play by year. They are great contributors and we have a -- we remain with a strong relationship. And if there's ever a conflict of interest, we will deal with it at the time because we have full flexibility in that regard. But right now we think we are okay.

Okay. So the reason I asked, Pedro, is they represent a sizable chunk of your Board and obviously they are looking to work more closely with Avianca based on what has been reported in the press. You also work with Avianca through the Star alliance. And so my sense is that sizable chunk of the Board who has a very solid skill set. Both of them are very, very capable executives.

When you have decisions at the Board level as it relates to alliances, JVs and mergers, I guess presumably they have to recluse themselves from those conversations. You are not able to take advantage of that skill set. Is that right or not?

That is correct in the case of a potential conflict of interest.

Okay.

If there is no potential conflict of interest, then they of course participate fully. But, yes, they -- you are right.

Okay. And then just the last one on Wingo and I know there have been several questions that have been asked about this. As I recall, I believe -- because Copa Colombia does have to file financials, and correct me if I am wrong, but I believe maybe at the operating level last year, first half of 2016, maybe it lost somewhere on the order of about $30 million. I could be wrong on this. You can correct me if you can.

But you had indicated that it was off to a strong start obviously because December-January seasonally are strong months, so that was anticipated. I thought I heard you say that it was on an improvement or a trajectory of improvement. You used the word modest and I didn't -- maybe that was you were characterizing something else and I wasn't sure if that was related to losing less than $30 million, a lot less than $30 million or maybe you were just talking about operationally and execution.

Can you just talk about maybe the initial trends and what you are seeing as we move into the first half of 2017? Could we see a number that's a lot less than that $30 million?

Right. So, yes -- so what I said had to do with financial results and what I meant to say was that Wingo should result -- or what we are projecting is that it will result in modest, a modest reduction in losses for the -- what was the Copa Colombia off hub and domestic network, which is now flown under the Wingo brand.

But that's more of a function. Is that more of a function of just startup costs and rolling up a new brand, a new system, so that's maybe a bit of a -- maybe that's having some negative impact and that goes away, that's only temporary? Is that how we should think about?

Well, it's also spooling up something that starts from scratch.

Yes.

Because Wingo, it's a totally different business model, direct distribution, has to create its own brand, it's own clientele, et cetera. So it's part of spooling up a brand new operation under a very different business model. There are four startup costs, but I would say that's not really the big issue right now, just that it takes time.

Okay. Okay, very good. Thanks, Pedro. Thanks, Jose. Thanks, everyone.

Thank you, Mike.

Thanks, Mike.

Dan McKenzie, Buckingham Research.

So a couple of questions. I guess for those of us that track bookings as a clue to revenue trends, what we need to keep in mind about the volumetric for margin? I appreciate you can make them whatever you want, but, all else equal, January and February appear very strong. And so I am just wondering what we should expect for March. And I am just really getting out the Easter shift, so I am thinking maybe down 4% to 5%. And then I guess just -- but maybe you can help me there.

And then related to this, how much of a revenue shift out of the first quarter into the second quarter does that Easter shift really account for?

Yes, Dan. This is Jose here. I would say -- I will leave it at saying that for the quarter we are seeing a year-over-year load factor improvement as I would call it, kind of say low to mid single-digits. So there is I think the same trend that we just saw in January with our report yesterday for the rest of the first quarter independent. That's including of course the fact that there is a shift in Easter, but we are still seeing that the first quarter traffic is coming in above what we saw last year.

Okay. And then the Easter shift is -- should we think about that as maybe a 50 bps of RASM that gets shifted in the second quarter or a 100 bps or 150 bps? I have found that that can vary pretty greatly by airline.

Yes, there is going to be an improvement. I think I mentioned earlier that there was going to be an improvement that we saw in terms of RASM for the first half in total. What I am seeing here basically is that there is -- yes, there is, you could argue, an improvement in RASM in Q2 on a year-over-year basis that is in that range.

Okay. And then, Jose, what is the balance sheet philosophy this year and how should we think about a year-end debt target? And just given the low leverage, is there a plan to raise some leverage even though you don't need it, and if so, might that be cash that could be returned or earmarked as available to return to shareholders?

So this year, we -- first of all, we do want to maintain having a strong balance sheet. I think that in moments of what occurred last year that is a very good thing to have in our arsenal. This year we do have a set of commitments related to the aircrafts that are coming in in 2018 that are somewhat larger than what we had in 2016, more than anything pre-delivery deposits associated with aircraft and deliveries for 2018. So there are some more excess cash needs for this year.

But certainly we do see that the fact that we do have a strong cash position has created a good position to have for us. That's I think the reason why our Board decided to maintain the dividend payout in the same level that what we had last year, even though in theory we should have according to our policy paid slightly less in dividends. So that's kind of where we are seeing it.

Yes, yes, I caught that. So can you just remind us what CapEx is for this year, Jose, including the pre-delivery deposits or if you want to break those up separately?

Yes. So the total CapEx for the year is going to be around I want to say about $270 million, of which cash is around $180.

Perfect.

And that's including -- the $268 million or the $270 million includes the pre-delivery deposits with Boeing where we have four aircrafts to be delivered next year.

Perfect. Thanks much, guys.

Yes.

Thank you.

Pedro Bruno, Santander.

It's actually a follow-up on the depreciation question before. So first of all just to make sure I understood correctly, we should expect a higher depreciation going forward, right? The adjustment that was done was only done -- was all done on the fourth quarter, but it was for the period of 2016. I think you already explained that. I just wanted to make sure I understood correctly.

But my main question is, even if you adjust to the $12 million depreciation impact on the fourth quarter, you still see fourth quarter 20% higher than the quarter before, than 3Q. What would explain that please? Thank you.

There are some other minor adjustments in the fourth quarter related to -- one-time events related to maintenance, more than anything, of aircraft, that maintenance that came in during the second half of the year that we started depreciating during the fourth quarter. So that explains kind of the rest of the difference. And those were one-offs that occurred in the fourth quarter.

And indeed just to reiterate, during the 2017 period you will see an increase in the depreciation line of around $3 million per quarter, all else being equal. And again, just to reiterate, the incremental depreciation expense is included in our $0.064 ex-fuel CASM guide for 2017.

It's clear now. So $3 million in excess depreciation for the following years and that's on the base of the approximately $35 million depreciation we have been seeing until the third quarter. So all the difference is basically one-off. All the difference from the $12 million that you explained is basically one-offs then, right?

Correct. Yes.

Okay. Thank you very much.

Renato Salomone, Itau Unibanco.

My first question is, thinking about the network effect of the recovery in South American demand, can you comment on demand to destinations like Las Vegas and Boston that are a bit sensitive to Brazil?

So there is an improvement in those destinations. In the case of Las Vegas, we reduced capacity quite a bit last year and we are remaining that way. We are keeping capacity low. So that also helps. But we have seen an improvement in Brazilian demand throughout our network, partially related to the strengthening of the currency in Brazil of course. And then our capacity in Brazil is less than what it was in 2015 and even in 2016. So those two factors have contributed. But again, in general, Brazil has -- getting stronger probably faster than what we expected.

Perfect. Then a final question. And, Pedro, you added a lot of talent and seniority to Copa's commercial team over the past 18 months. What are the main differences you observed in this part of the business in this recovery compared to previous recovery?

Well, yes, interesting question. So obviously we were faced with a -- I mean I don't to say that it's over, but 2015 and 2016 were challenging years in our part of world. And we did strengthen our commercial team quite a bit. We brought a number of very talented experienced executives. And I would say that we have -- or what they have brought in is experience in handling difficult situations, but a lot of also technical knowledge, precise commercial aviation technical knowledge that has been very, very valuable to us. And I think you've seen the results in how we are performing commercially.

Excellent. Thank you very much.

Thanks, Renato.

That concludes our Q&A session. I will now like to turn the call back to Pedro Heilbron for any further remarks.

Okay. Thank you. Thank you all. This concludes our fourth-quarter earnings call. As always, thank you for being with us and thank you for your continued support. Have a great day and we will see you in the next call. Thank you very much.

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