Copa Holdings SA (CPA) 2018 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to Copa Holdings Third Quarter Earnings Call.

(Operator Instructions) As a reminder, this call is being webcast and recorded on November 15, 2018.

Now I will turn the conference over to Raul Pascual, Director of Investor Relations.

Sir, you may begin.

Thank you, Brian, and welcome, everyone, to our Third Quarter Earnings Call.

Joining us today are Pedro Heilbron, CEO of Copa Holding; and Jose Montero, our CFO.

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' financial reports 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 earnings release, which has been posted on the company's website, copa.com.

Our discussion today will contain forward-looking statements, not limited to historical facts, that reflect the company's current beliefs, expectations and 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 are discussed in our annual report filed with the SEC.

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

Thank you, Raul.

Good morning to all, and thanks for participating in our third quarter earnings call.

First, I want to recognize all of our coworkers for their efforts during the quarter.

Their ongoing dedication and commitment keeps us at the forefront of Latin American aviation.

As you can see in our third quarter release, we confronted a number of challenges during the quarter.

On the expense side, we had more than $48 million of additional cost due to higher fuel prices.

And on the revenue front, we faced a deteriorating demand environment, mainly driven by economic and currency weakness in Brazil and Argentina.

This is not exclusive to Copa, as international IATA BSV sales for the entire industry in these 2 markets measured in U.S. dollars were down about 25% and 40%, respectively, for the quarter.

Most of the -- rest of our network was not affected year-over-year.

However, we were not able to compensate for the additional fuel expense.

We firmly believe this is a temporary situation and are confident in the long-term value and potential of this market, the strength of our business model and our ability to return to higher margins.

Among the main highlights for the quarter, passenger traffic grew 4.8% year-over-year on a capacity growth of 6.6%.

This resulted in an 84.3% load factor, 1.4 percentage points lower year-over-year.

Yields came in at $0.116 or 3.3% lower than in the third quarter of 2017.

Unit revenues or RASM decreased 4.2% year-over-year to $0.101.

On the cost side, CASM came in at $0.90, 4.3% higher year-over-year due to higher fuel costs.

However, ex-fuel unit cost came in at $0.06 or 5.5% lower year-over-year due to the timing of certain events and cost-reduction efforts.

The resulting operating margins came in at 11%.

On the operational front, Copa earnings delivered an on-time performance of 88.3% and a completion factor of 99.8%, again amongst the best in the world.

Turning now to the rest of 2018 and 2019.

Demand weakness in Brazil and Argentina continues to put significant pressure on our unit revenues, also affecting other parts of our network such as the Caribbean and North America.

As a result, we are adjusting our guidance to reflect our performance in the third quarter across a weaker fourth quarter forecast.

We are also adjusting our capacity in the affected markets, especially during low season.

For the fourth quarter of 2018, we're reducing our Brazil capacity year-over-year by about 10% and reducing our growth in Argentina from 20% to about 10%.

In the past few weeks, we have seen some encouraging signs, decreasing oil prices and stability in both the Brazilian real and Argentinian peso.

There also seems to be more optimistic and regarding the economic prospects for both countries.

While there is still a long way to go, and at this point, we do not want to be too optimistic.

From what we can see right now, we will still be dealing with our top unit revenue environment at least into the first quarter of 2019.

On a more positive note, we continue making progress on many fronts.

As you have seen in our results, our unit cost, excluding fuel are as low as they ever been, and we continue looking for further saving opportunities.

With the production of the 737 MAX 9, we also launched our new business class product DREAMS for a longer flights, which should help us increase the yields in the front of the cabin in those routes.

We continue to make progress in ancillary revenues and loyalty program, including seat assignment, second back seat in selected markets and the selling of miles and upgrades among others.

We also have made significant progress in deploying new technology tools.

As of last month, our call center agents are using the new passenger service interface, which among other benefits allows us to sell ancillary products for the first time through this channel.

We expect this to enhance and accelerate our ancillary revenue performance.

By the end of the year, we'll also have this capability in at least 4 airports and expect to have full deployment in 2019.

In summary, we continue working to strengthen our business model and further our ability to produce premium margins.

Turning now to our fleet.

After receiving our last 2 737-800s and returning a leased Embraer-190 in the first half of the year, we began taking delivery of our first 3 737 MAX 9s, 1 in August, 1 in October and the other in November.

We expect to receive 2 more during the next few weeks to end the year with a consolidated fleet of 106 aircrafts.

As for our previously published fleet trend, we expect to receive 8 Boeing 737 MAX 9s in 2019.

However, we're also announcing that after a review of our demand expectation and long-term fleet and network plan, we have decided to further reduce our 100-seat aircraft fleet, and thus we expect to retire up to 6 Embraer-190, 5 of which will leave next year.

So we now expect to end 2019 with 109 aircrafts, 3 more than 2018.

This decision leads to slower 2019 growth, but more importantly, higher long-term efficiency and structurally lower unit cost leading to higher profits.

Jose will give more details on this transaction.

Regarding our network, in July, we started 3 new flights Fortaleza and Salvador, our 8th and 9th destinations in Brazil and Bridgetown, Barbados, our 16th destination in the Caribbean.

We also announced 2 new destinations for the end of the year, Puerto Vallarta in Mexico and Salta in Argentina, both starting in December.

Although the timing may not be ideal, we believe in the long-term value of these additions.

By the end of the year, Copa will provide service to 80 destinations in 32 countries, in North, Central, South America and the Caribbean, by far the most complete and efficient network for intra-America travel.

On the operational front, we continue delivering industry-leading results.

We're very proud of the efforts that have more than 9,000 coworkers put in day after day to place us among the most on-time airlines in the world.

Finally, I'm glad to report that Wingo, although a very small 2% of our revenues continues to do better than expected, both operationally and financially.

In fact, during 2019, we will be swapping their 4 737-700s for 4 737-800s, which will further lower their unit costs and increase profitability.

Furthermore, we expect to transfer a fifth 737-800 to the Wingo fleet and most likely based it in Panama.

To summarize, we expect global unit revenues for the rest of the year and into the first part of 2019 based mostly on yield softness in Brazil and Argentina.

We're being proactive and taking steps to moderate our growth to accommodate these market conditions.

Our team continues to deliver world-class operational results, including one of the world's highest on-time performance.

We continue delivering efficiencies and savings, which have further lowered our industry-leading unit costs.

We're also continue focusing on revenue opportunities, including ancillary initiatives that are aimed at strengthening our results.

Lastly, we're as confident as ever in our business model and our financial strength.

Even during a challenging year, we continue delivering a great product, leading unit cost and double-digit margins, making us the best position to consistently deliver industry-leading results, especially once the market conditions in our region normalize.

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

Thank you, Pedro.

Good morning, everyone, and thanks for joining us.

As always, I want to start by acknowledging our great Copa team for all their achievements during a challenging quarter.

During the third quarter, we grew capacity by 6.6% year-over-year, while revenue passenger miles increased 4.8% year-over-year, which resulted in a consolidated load factor of 84.3%, a 1.4 percentage point decrease versus Q3 2017.

Yields were also weaker coming in 3.3% below last year, as year-over-year decline was mostly driven by the continued weakness in the Brazilian real and the Argentine peso.

Combined sales in these 2 currencies represented about 28% of our total sales in 2017.

During Q3 2017, our RASM was $0.106 and in Q3 2018, it came in at $0.101 Consolidated revenues increased 2.1% year-over-year to over $672 million.

On the expense side, our third quarter operating expenses increased 11.2% year-over-year on the 6.6% capacity growth, which resulted in our cost per available seat mile increasing 4.3% to $0.09, specifically as a function of higher jet fuel prices.

For the quarter, our effective all-in fuel price averaged $2.20 per gallon, an increase of almost 32% versus $1.82 per gallon that we averaged in Q3 2017.

Our total fuel expense for the quarter was $57.2 million above Q3 2017, of which $48.6 million are related to the fuel price increase.

However, we were able to offset some of this increase with our continued savings initiatives.

Specifically, we have already achieved the initial results of our corporate plan to reduce our yearly expenses by $50 million and have decided to expand the program to pursue additional opportunities in the range of $15 million per year.

For the third quarter, our cost per available seat mile, excluding fuel, ex fuel CASM came in at 5.5% lower year-over-year, coming down from $0.063 in Q3 2017 to $0.06 in this quarter.

For the full year, we expect our ex fuel CASM to come in at a very strong $0.062, one of the lowest for any full-service carrier.

Consolidated operating earnings for the quarter came in 38% lower at $74.3 million, resulting in an operating margin of 11%, 7.3 percentage points lower than the 18.3% generated in Q3 2017.

Looking at nonoperating income and expense, the third quarter generated a net nonoperating expense of $5.3 million compared to $900,000 reported for Q3 2017, which included a $2.9 million gain from the mark-to-market of derivative contracts open at that time.

In terms of net results, net earnings for the quarter came in at $57.7 million or earnings per share of $1.36, 45% lower than the earnings per share reported in Q3 2017.

Turning to the balance sheet.

We closed the quarter with a very strong financial position.

Assets totaled $4.4 billion, owners' equity totaled $2 billion, debt plus capitalized leases totaled $2 billion and our adjusted net debt-to-EBITDA ratio came in at a very strong 1.6x, by far the lowest in our peer group.

We closed the quarter with approximately $1.2 billion in debt, more than 60% of which is fixed with the blended rate including fixed and including rate debt of approximately 3.4%.

In regards to cash, short- and long-term investments, we closed the quarter with $916 million.

Our cash balance at the end of the quarter represents approximately 36% of last 12 months revenues.

In terms of fleet, we received our first MAX 9 during the quarter, followed by our second and third MAX 9s in the months of October and November and expect to receive 2 more aircraft during the fourth quarter, to end the year with a total of 106 aircraft.

It is important to note that we have already secured the financing for all the aircraft we will take delivery of in 2018 and 2019.

We have also made a decision to reduce our Embraer fleet and have signed a letter of intent with Azorra Aviation for the sale of up to 6 E-190 aircraft, 5 of which are expected to leave our fleet during 2019.

The transaction will cost an impairment to the entire Embraer fleet generating a one-time noncash adjustment of around $163 million that will be recorded during the fourth quarter of 2018.

The departure of these 6 aircraft will represent an estimated yearly benefit to our network of over $10 million.

This transaction also is a reflection of the embedded flexibility in our fleet plan that we have discussed many times before, and this flexibility allows us to adjust our capacity to a current economic environment.

Finally, I'm pleased to announce that our Board of Directors has ratified the fourth quarterly dividend of $0.87 per share to be paid on December 14 to all shareholders of record as of November 30.

So to summarize, the third quarter performance was affected by the weakness in some of the currencies in the region as well as the increase in the price of jet fuel.

However, we continue to deliver industry-leading unit costs, and we continue pursuing our cost-savings initiatives.

Our network continues to being the most convenient for travel within the Americas with world-class operating indicators.

We have one of the strongest balance sheets in the industry, and we continue to return value to our shareholders.

We're also updating our guidance for 2018 based on our expectations for the remainder of the year.

We're maintaining our capacity growth in terms of ASMs at approximately 8%.

And given the continued softness in the yield environment, mainly driven by the weakness in currencies in Brazil and Argentina as well as the current expectation for fuel prices, we now expect our full year operating margin to come in at approximately 12%.

Our 2018 full year guidance is based on the following assumptions: load factor of approximately 84%; RASM of approximately $0.104; CASM ex-fuel of approximately $0.062; and higher effective fuel price per gallon, including into-plane of approximately $2.35.

Although there is still very limited visibility into 2019 and there has been recent volatility in the price of fuel and in the regional currencies, we're also providing preliminary guidance for 2019 based on our operational plan and expectations for our travel demand.

In terms of capacity, ASMs are expected to grow by approximately 3%, and we are assuming continued weakness in the regional economies during the first half of the year and a moderate recovery during the second half.

Therefore, operating margin is expected in the range of 11% to 13%.

Our 2019 preliminary full year guidance is based on the following assumptions: CASM ex-fuel of approximately $0.062 and an effective fuel price per gallon, including $0.27 of into-plane of approximately $2.35.

Thank you.

And with that, we'll open the call to some questions.

(Operator Instructions) And our first question will come from the line of Josh Milberg with Morgan Stanley.

So I'll just go with one question and my question is on your guided $0.062 CASM ex-fuel, the number for 2019.

I realized, of course, that inflation is a factor, but just wanted to understand why that number isn't showing more improvement just given all the cost initiatives that you guys have highlighted obviously in areas of distribution, maintenance and elsewhere and also the expansion in the targeted reductions in terms of savings from $50 million to $65 million, that you guys just highlighted?

Josh, this Jose here.

And I -- first, I'd like to start by saying that our $0.062 CASM is the lowest that it's ever been for this year.

And so we're guiding for $0.062 for next year, based mostly on the fact that our growth rate for next year is just 3%.

And so there is, as you know -- even though we have the initiatives that you mentioned, there is, of course, some inflation assumed in there as well related to overflight fees, airport fees and just regular salaries and benefit inflation.

So there is some inflation embedded in the $0.062 figure, and also driven by the fact that our growth for next year is lower 3%.

Our next question will come from the line of Helane Becker with Cowen and Company.

I have 2 questions.

First is, Pedro, when you think about the Avianca codeshare agreement that you guys just signed, can you just talk about how you envision it working?

And in terms of percentage of seats filled, you're pretty full.

So how many passengers realistically do you think you would get?

So maybe, how should we think about that?

And then my other question is, when you -- you're earning the dividend, but when you think about your payout ratio is what, 40% this year, I think.

Can you just remind us of how the Board thinks about the payout?

And how we should think about it for 2019?

Helane, this is Jose here.

We'll, answer first the second question related to the dividend.

Yes, our policy, our current policy is to payout 40% of prior year's adjusted net income.

So we -- our Board has not mentioned anything about changing the process.

So we will expect that, that dividend payout ratio would maintain itself.

As you know, our company is very strong about returning value to the shareholder.

In terms of your first question.

Helane, it's Pedro.

I think you referred to the 3 way Avianca, Copa, United JV or joint business agreement that was announced, that has not yet being made official.

So it's still needs to -- negotiations need to conclude.

Hopefully, that will happen before the end of the year.

And it's going to then take at least 1.5 year to get it all approved, especially in Panama, Colombia and the U.S. So this will -- at best enter into effect towards the end of 2020, I would say.

And it relates mostly -- I mean, it relates only to revenues or traffic between South America or Latin America, let's say, with some exclusions and the U.S. and vice versa.

So U.S. to Latin America.

Okay.

No.

It's okay.

I just thought there was a comment recently that you and one of the other airlines had maybe with Azul had signed a codeshare agreement.

And I was just kind of wondering, how we should think about that?

And then, the Avianca I think was very helpful.

Right.

So again, the Avianca thing is end, end of 2020.

So we will have time to talk some more about that, especially once it's official.

We recently announced a codeshare agreement with Azul and we know Azul is the growing airline in Brazil and it's -- Brazil is a very important market for us.

Azul also has a close relationship with United.

As a matter of fact, United is part owner of Azul.

So I think this is going to strengthen our connectivity inside Brazil and help the performance of our Brazilian network going forward.

And our next question will come from the line of Dan McKenzie with Buckingham Research.

What -- first, I've got a couple of questions here.

First, what percent of revenue for Copa is from the Northeast Brazil to the U.S.?

And how should we think about the impact of that -- of the new nonstop find from a couple of Brazilian airlines with respect to the Copa revenue story?

Well, it's not significant.

First thing I should say, Dan, is that, our service to the Northeast of Brazil altogether, it's less than 1 flight per day.

I think it's 6 flights per week or maybe 7 flights per week.

That's the extent of our service to the Northeast of Brazil to Panama, and that includes connections to Central America, Mexico, the Caribbean and the U.S. So it's not very significant.

Plus a 2/3 of our Northeast Brazil service is very recent.

It's from July of this year.

So we're only starting to build those markets.

So there is not like we're facing a competition that's going against very established market and that we have to now make up.

So -- and I would say that even though the timing for that Northeast Brazil service was not ideal starting in July when Brazil was in the middle of getting back, the flights were doing okay.

Surprisingly so they're not doing so bad.

Obviously, yields are hurting, but loads are okay and we're very, very optimistic about the future of our Northeast Brazil service.

Good.

And with respect to Argentina, Pedro, I'm wondering if you could elaborate on the supply demand dynamic to Buenos Aires versus the rest of the country?

And how that might tie to your confidence, that things can get better in 2019 to the country?

Well, first, I should say that, what has happened in Argentina in terms of currency devaluation, was massive.

Argentina currency in the third quarter devaluated over 50% and it's sales -- industry sales were down over 40% in the Argentina market.

So it's very, very massive.

We also know from experience is that Argentina always comes back.

So we are optimistic, medium and long-term, but right now, the yield environment is extremely difficult in Argentina.

So again industry sales over 40% down, BSV IATA sales over 40% down in those 3 unit fares in dollars are around 30 -- 25% to 30% down.

I mean, it's tough situation and I'm giving you numbers up to October.

So more recently we're seeing demand in terms of load factor coming back and actually looking quite okay year-over-year, but yields.

Again yields still extremely weak.

And yes, Buenos Aires is holding off better than some of the other destinations.

Got it.

Do you have an update of when fare families might get turned on?

And what that contribution could potentially be as we think about the better IT behind some of the revenue management?

Yes.

I think we're doing -- we had fallen behind in some of these IT tools or initiatives.

And so the good thing with that is that we have a lot of upside ahead of us.

While all their earnings have had the right IT tool for a while, that's all ahead of us.

So the new passenger service, a user interface that we have just implemented it's allowing to us sell ancillary at the call center and soon as the airport.

And then your specific question is going to be more towards the end of 2019.

We are in the final stretch of a negotiating contracts for other tools that will allow us to be very effective with fare family, basically second half of 2019.

Our next question will come from the line of Savi Syth with Raymond James.

Just a quick question on the E-190s.

Any thoughts on when those might come out of the system?

And how we should think about capacity growth next year, in the kind of the first part of the year versus the second part of the year?

Savi, this is Jose here.

The E-190s are expected to leave -- I think it's mostly in the first part of the year, and -- but they will be replaced with aircrafts.

So I think that most of the growth that we have for next year is actually on gauge and it is backloaded towards the second half of the year.

So that's kind of how that 3% growth for next year is expected to pan out.

That's helpful.

And just on the Wingo, it seems like there is a favorable outlook.

I wonder if you could give a little bit more color there.

And just, how big can Wingo get, if you continue to see good results there?

Yes.

We are -- we've been very conservative and careful with Wingo, and we're picking that one day at a time or may be 1 month or 1 quarter at a time.

So the next step is that we're going to upgauge from 700 to 800, that's going to make their unit cost much more effective and it's going to have a nice impact to the profitability potential.

And as mentioned, a [5th] aircraft, which is about 20% capacity, which we're going to probably bases in Panama.

There are a few markets, and it's going to fly.

We do feel interchange is going to fly throughout their network, but it's going to probably based at the secondary airport they serve in Panama.

And again, we're going by steps.

How big can Wingo get?

It depends on many things.

It depends on the market, on capacity from everyone.

We want to have specific plans, and we'll just be very opportunistic with the airlines.

And our next question will come from the line of Alejandro Zamacona with Crédit Suisse.

So regarding the correction of the previous annual financial statements, I'm considering the reduction of the previous depreciation expenses.

What can we expect going forward?

Yes.

So look we -- just to give a little bit of background there, as far as -- as part of our IFRS 16 adoption process, we found an error in the way that we did the accruals for maintenance on owned aircraft.

And most of the correction is from years prior to 2015 and (inaudible) basically back in 2009, when we migrated from U.S. GAAP to IFRS.

And as you saw in our statement, you have an increase in the years between 2015 and 2017, it was around $15 million for those 3 years.

We expect going forward that the impact to the DNA line is going to be lower than that, and it is embedded into our full year 2019 guidance.

When you take this change in accrual policy together with some of the other items that we are announcing like the E-190 and the incoming aircraft, and I don't know overall basis it's a -- it's not material or not significant in the overall CASM ex of the company.

So overall, we don't expect it to change going forward the CASM of the company.

Okay.

And just a second question, if I may.

And so regarding the jet fuel provided in the 2019 guidance what would be the implicit price for the Brent that you're expecting in?

In terms of Brent, so we got, I think $2.08 jet fuel assumption for next year , where we got in terms of jet, and that's around $72 WTI.

Brent and -- about WTI $66 per barrel.

So it's $66 for Brent and...

No, it's only $72 for Brent and WTI is $66, around $66.

There's been a lot of volatility on in terms of the crack spread in recent months.

So that's, I think, an item that we have to take into account as well, when converting from crude into jet fuel.

And so I think that the good way of looking at it is $2.08 per gallon jet fuel assumption, excluding into-plane, right.

And as I mentioned in my script, we have an assumption of $0.27 per gallon of into-plane as well in our guidance for next year.

And our next question will come from the line of Stephen Trent with Citi.

Just one question from me, also accounting related.

When we think about next year's implementation of IFRS 16, what's the indication so to speak, with respect to where you guys might capitalize on leases given that some of your leases are pretty long tenure, but you've also got a young fleet.

So any indication would be helpful?

Steve, it's a great question.

IFRS 16, which is a lease standard is coming in line on the year 2019.

We're still working on the adoption of the standard.

It's a pretty complex sort of standard that the worldwide is being implemented this year.

Our CASM assumption for the year of $0.062, assumes already the implementation of the standard.

And as a matter of fact from the balance sheet standpoint, we are envisioning the balance sheet -- once you capitalize the leases, they -- I mean, they again very preliminarily because we're still implementing the standard.

But we are seeing that the capitalized lease is -- are going to be coming in at a lower rate than the 7x than what, kind of as unusual for the market.

So that's kind of our preliminary assessment of this, but will have more information on that in our Q4 earnings call, once we complete the implementation.

And our next question will come from the line of Duane Pfennigwerth with Evercore.

This is actually Ray on for Duane.

Your first guidance seems to imply unit revenue down roughly 7% in 4Q, do you think you could break that out between how much of that is being driven by Argentina, and how much of that is Brazil?

Yes.

Ray, this is Jose here.

It's essentially -- basically most of it is related to Brazil and Argentina indeed.

Both of them are on a unit revenue basis, down on a year-over-year basis, double-digit range.

So the rest of the network, there is essentially flat here, some of them, they are slightly down, but the big drivers there are either Brazil and Argentina or influenced by the fleet of Brazil and Argentina.

So I'd say it's most of it is related to these 2 markets that are originating in nature for us in terms of passengers.

And on a brighter note, when markets are you seeing improvement?

Well, I think that new South America markets are performing reasonably well.

And so yes, there's some markets out there that are still doing well.

So I think what I'm saying is that, the big downturn is encapsulated into kind of [indiscernible] especially Brazil and Argentina.

And our next question will come from the line of Michael Linenberg with Deutsche Bank.

This is [Kush] on for Mike.

Just had 2 questions here.

First, could you help us just quantify the synergistic benefits and the timing around the codeshare you announced last week with Azul.

I'm trying to understand whether it might help mitigate some of the yield weakness you anticipate into the first half of -- first half of the year in Brazil, next year?

Okay.

This is Pedro.

It's always hard to predict, that it's always going to be positive.

It's better feed.

It's more effective feed.

And again, it's more about revenue synergy.

It's something that's really difficult to predict.

It has started and it's not something that we factor in our numbers.

It's always an upside, but we don't really have a specific projection for it.

It's something more kind of an aftereffect analysis that we do, knowing that there is really no downside to implementing a codeshare, especially with the (inaudible) vast network in a country that's very important for us.

So the cost of doing so is so small that, they would basically look at the -- how the 2 networks come together.

We build up at the potential benefit, but we don't really make any projections.

We just wait to see what happen.

So hard for us to predict.

We know it's going to be positive.

Great.

And then, given some of the changes you discussed around on the fleet plan, how should we think about CapEx next year?

So our CapEx for next year, I'd say, on a total basis it's about $600 million, of which cash CapEx is around $200 million.

So I think that's a good way of looking at it.

And our next question will come from the line of Pedro Pascoal with JPMorgan.

A quick one, I think, for Jose.

Could you share with us what assumption are you using for your next year guidance in terms of currency for Brazil and Argentina, the average spot prices?

Yes.

I'd say that the assumption in general terms is that the currencies are going to remain, in the case of Brazil, sort of flattish.

I think that indicates Argentina, we're still are not seeing a recovery.

So it is very, very hard to determine if there will be a recovery, what, the way that we're framing it is that we're assuming a from a unit revenue basis, still a drop in unit revenues and then low to mid-single digits on a percent basis for the first half and then a slight recovery in the low single digits for the second half of the year.

And so the other aspect that's important to mention, related to the currencies is that we saw the big trough in the currency exchange rate, back about -- let's call it, 1.5 month ago.

And those sales that were made 1 month, 1.5 month ago are influencing the fourth quarter and the very early part of 2019.

So a lot of that is embedded in the guidance.

So what I mean by this is that there is a lag between the exchange rate at one particular moment and how that translates into revenues.

And our last question will come from the line of Dan McKenzie with Buckingham Research.

Actually, my question follows up on those last 2. With respect to the non-field cost guide for 2019, can you remind us what percent of the costs are affected by swings in foreign exchange?

And I guess, what I'm getting at it, if we see a material strengthening in either the Argentina peso or Brazilian real, I'm just wondering how that might impact your non-field cost outlook for next year?

Yes, Dan.

About -- I want to say about 2/3 of our costs are in U.S. dollar and the rest are in foreign currencies.

But the majority of that 1/3 is in the Colombian peso.

So it isn't really -- you don't have a significant cost base in the Brazil and Argentina -- -- or Argentina.

Got it.

And then just kind of following up on here.

It seems like there has been some volatility and kind of the recent demand data, it seems like it could be tied to the elections in perhaps U.S. and Brazil.

And so I'm just wondering if you kind of look at the revenue outlook to the end of the year, whether that outlook flatlines the recent leg down at least seems visible on the publicly available data?

Or is a temporary blip?

And I'm just kind of wondering, how you're thinking about holiday demand this year?

Just trying to get some perspective around kind of the full year guide as it pertains in the fourth quarter here?

Dan, it's Pedro.

Let me make a few comments and then let Jose also add.

But -- so our Q4 -- our fourth quarter revenue projections, I think, as Jose alluded to, are based on [indiscernible] sales that were made in the middle of the currency crisis in Brazil and Argentina.

So during the third quarter.

So Q4 was doomed in a way, because of when we sell in Q4 and when this happened.

And that's also affecting the-- some of the Q1 revenue and at least the Q1 projections we have right now.

If we can remember that, Brazil real hit BRL 4.20.

It's now at BRL 3.70 and the Argentina peso hit ARS 42, and it's now at ARS 36.

So kind of the worst of that currency devaluations when we were selling Q4 and some of January and February of the first quarter.

So group revenue projections are affected by that, but that's a reality, right?

That's real.

That's what happened.

Lately, as I mentioned before, we're seeing demand in terms of traffic strengthening in both markets.

We've had also cut back some capacity.

So that obviously helps, carding capacity helps, but load factors year-over-year are either flat or above 2017 in both Brazil and Argentina in terms of what we're seeing right now.

But yields are still very weak.

So in both markets for the reasons I just mentioned, we're projecting a weaker yields in the first quarter.

And -- but we are optimistic that we're going to see a recovery in the rest of the year.

How soon and how strong, hard to tell right now.

I was going to say exactly.

I think that, what we're seeing is Brazil is stabilizing a little bit ahead of Argentina at this stage.

So I think a point of reference for how we're seeing things at the moment.

Thank you.

Ladies and gentlemen, this concludes our question-and-answer session for today.

So now it is my pleasure to hand the conference back over to Mr. Pedro Heilbron for any closing comments or remarks.

Okay.

Thank you.

So this concludes our earnings call.

Thank you for being with us.

Thank you for your continued support.

And I want to emphasize that, that we have all the pieces in the right place.

And this maybe I'm repeating myself, but we have the best unit cost of almost any full-service airline.

Our heart is still in the best geographic position and still growing and strengthening.

And operationally, we have a product that customers want to fly.

So we faced very strong headwinds, may be again maybe as the story of the last few years in these 2 markets, but we know those markets are coming back and we're going to be in the best position to continue returning very strong margins.

So again, thank you, and have a great day.

Ladies and gentlemen, thank you for your participation.

That concludes the presentation.

You may now disconnect, and have a wonderful day.