Copa Holdings SA (CPA) 2018 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.

(Operator Instructions) As a reminder, this call is being webcast and recorded on February 14, 2019.

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

Sir, you may begin.

Thank you very much, Victor, and welcome, everyone, to our fourth quarter and full year 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 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.

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 detail 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 fourth quarter earnings call.

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

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

As expected, during the fourth quarter we faced a soft unit revenue environment, driven mostly by the continued yield weakness in Brazil and Argentina.

Furthermore, we only saw a small benefit from the softening fuel prices, as our effective jet fuel prices started to decrease very late in the quarter.

When compared to the fourth quarter of 2018, we had close to $30 million of additional expenses due to fuel prices alone.

Among the main highlights for the quarter, passenger traffic grew almost 5% year-over-year on a capacity growth of 5.5%.

This resulted in an 82.8% load factor, 0.4 percentage points lower year-over-year.

Yields came in at $0.118 or 7.7% lower than in the fourth quarter of 2017.

Unit revenues or RASM decreased 7.7% year-over-year to $0.102.

On the cost side, our CASM, excluding the onetime noncash fleet impairment charge, came in at $0.93, 0.5% higher year-over-year due to higher fuel cost.

However, adjusted ex fuel CASM came in at $0.062 or 5.8% lower year-over-year.

The resulting operating margin, excluding special items, came in at 9%.

On the operational front, Copa Airlines delivered an on-time performance of 89.7%, and a completion factor of 99.8%, again, industry-leading results.

Now turning to our main highlights for the full year 2018.

Unit revenues at $0.104, came in close to 1.6% lower year-over-year, driven by a 2.1% decrease in yields, partly offset by 0.2 percentage point increase in load factor.

Adjusted CASM ex fuel decreased 4.1% to $0.061 amongst the lowest for a full service airline.

Despite the headwind of a soft unit revenue environment and higher-than-expected fuel prices, we reached an operating margin, excluding special items, of 12.5% for the year.

As for our network expansion, during 2018 we added 5 new destinations.

Fortaleza and Salvador in Brazil, Bridgetown, Barbados; Puerto Vallarta, Mexico and Salta in Argentina, ending the year with 80 destinations in North, Central, South America and the Caribbean, strengthening our position as the most complete and convenient hub in Latin America.

In terms of fleet, during 2018, we returned 1 lease Embraer-190 and we took delivery of 6 aircraft: 2 Boeing 737-800s and 4 737 MAX 9 aircraft, ending the year with 105 aircraft.

With introduction of the 737 MAX 9, we also launched our new business class product, DREAMS, with lie-flat seats and other amenities for our longest flight, which should help us increase yields in the front cabin in those routes.

On the operational front, we delivered an on-time performance of 89.7% for the year.

And were recently recognized by FlightStats for the sixth consecutive year as the most on-time airline in Latin America.

And by OAG as the most on-time airline in the world.

I like to take this opportunity to thank our more than 9,000 employees for everything they do to be #1 and continuously deliver a great travel experience to our customers.

Finally, Wingo continued to do well, both operationally and financially.

As mentioned in the third quarter earnings call, later in 2019, we will be swapping their 4 737-700s for 737-800s, which will further lower their unit cost and increase profitability.

We also expect to transfer a fifth 737-800 to the Wingo fleet, and most likely base it in Panama.

Turning now to 2019.

We're still operating in a soft yield environment, driven mainly by Brazil and Argentina.

So we expect to continue seeing weak unit revenues in the first half of 2019, driven by low yields, especially when compared to a very strong first quarter in 2018.

The currencies in these countries have been stable recently, and at least in the case of Brazil, the economic prospects are improving.

As a matter of fact, the IMF is projecting for Brazil a GDP growth of 2.5% compared to 1.3% in 2018.

There has also been some rationalization of capacity in both markets.

So we expect the demand environment to improve, but probably not sooner than the second half of the year.

As a matter of fact, our recent sales data is showing improvement in yields across the network, including positive year-over-year numbers for the second half of the year.

Also, fuel prices are lower than in 2018.

So if this continues, it should certainly help our results for the year.

As always, José will provide a detailed update on our 2019 guidance.

While we are confident that the demand environment will continue to improve, we remain very focused on initiatives to make us even more resilient during this downturn.

We continue driving initiatives to strengthen our top line and are focusing on more -- are focusing more than ever on maintaining extremely competitive unit cost.

We continue to make progress in ancillary revenues and loyalty program initiatives, including selling seat alignment and expanded second bag fee program, the selling of miles and upgrades among others.

We have also made significant progress in deploying new technology tools, which should help us enhance and accelerate this result by the end of the year.

Our current plan includes implementing basic economy fares in the fourth quarter.

Regarding our fleet.

During January, we received 1 Boeing 737 MAX 9, originally scheduled for December 2018.

And closed the sale of 1 Embraer-190.

During the remainder of the year, we expect to receive 8 737 MAX 9s and finalize the sale of 4 Embraer-190, to end the year with a 109 aircraft.

More than 10% will be MAX 9, which should help us improve fuel efficiency, decrease our overall unit cost and increase our yields on longer-haul routes, thanks to the DREAMS business class product.

Finally, we recently announced a new destination, Paramaribo in Suriname starting in July.

By the end of the year, Copa will provide service to 81 destinations in 33 countries in North, Central, South America and the Caribbean, by far the most complete and efficient network for intra-America travel.

To summarize, we expect a challenging revenue environment in the first part of 2019 based mostly on continued yield softness in Brazil and Argentina.

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

Our team continues to deliver world-leading operational results.

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

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

Lastly, we're 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 as the market conditions in our region continue to 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'd like to join Pedro in acknowledging our great Copa team for all their achievements during a challenging year.

I'll start by going over our full year highlights.

We delivered a load factor of 83.4% on an 8% capacity growth.

Yields, however, came under pressure in the second half of the year due to continued weakness in the Brazilian real and Argentine peso, pushing unit revenues down 1.6% to $0.104.

We decreased our fuel unit cost -- ex fuel unit cost by 4.1% to $0.061, one of the lowest in the world for full-service carrier.

However, fuel prices increased about 25% year-over-year offsetting all of our ex fuel CASM efficiencies.

And putting pressure on our operating margin, which came in at 12.5%, net of special items.

On the operational front, we strengthened our network by adding 5 new destinations.

We took delivery of our first 737 MAX aircraft.

We continue delivering a world-class operating product and we're recognized as the most on-time airline in the world.

We've been close before, so it is gratifying for our entire team to achieve the #1 spot.

Reported net income for the full year 2018 came in at $88.1 million, which translates to earnings per share of $2.07.

Excluding special items, mainly the noncash and nonrecurring impairment charge of $188.6 million related to the Embraer-190 fleet, adjusted net income came in at $276.7 million or adjusted earnings per share of $6.52, 23.5% lower than the adjusted net income of $361.2 million or adjusted earnings per share of $8.25 in 2017.

Now turning to our fourth quarter results.

We grew capacity by 5.5% year-over-year, while revenue passenger miles increased 4.9% year-over-year, which resulted in a consolidated load factor of 82.8%, a 0.4 percentage point decrease versus Q4 2017.

Yields were also weaker coming in 7.7% below last year.

This year-over-year decline was mostly driven by the continued weakness in the Brazilian real and the Argentine peso.

Our Q4 2018 RASM came in at $0.102 or 7.7% lower than that the $0.11 reported for Q4 2017.

Consolidated revenues decreased 2.7% year-over-year to $656 million.

On the expense side, excluding special items, our fourth quarter operating expenses increased 6% year-over-year on the 5.5% capacity growth, which resulted in our cost per available seat mile increasing 0.5% to $0.093, specifically as a function of higher jet fuel prices.

For the quarter, our effective all-in fuel price averaged $2.38 per gallon, an increase of 17.5% versus the $2.03 per gallon that we averaged in Q4 2017.

Our total fuel expense for the quarter was $36.7 million above Q4 2017, of which $29 million are related to the fuel price increase and the rest due to the additional capacity flow during the quarter.

For the fourth quarter, our unit cost, excluding fuel, ex fuel CASM, came in 5.8% lower year-over-year, excluding special items, coming down from $0.066 in Q4 2017 to $0.062 in this quarter.

This reduction in our unit cost for the fourth quarter came mainly due to lower maintenance expenses related to the return of leased aircraft as well as to the continued focus in the reduction of overhead expenses and lower variable compensation expenses.

Consolidated operating earnings for the quarter came in 47% lower at $58.9 million, resulting in an operating margin of 9%, 7.5 percentage points lower than the 16.4% generated in Q4 2017.

Looking at nonoperating income and expense and excluding special items, the fourth quarter generated a net nonoperating expense of $10.9 million compared to a $9.8 million loss reported in Q4 2017, mainly as a result of a foreign currency fluctuation loss of $7.3 million realized in Q4 2018 compared to a $5.7 million loss in 2017.

In terms of net results, the quarter generated a net loss of $156 million or loss per share of $3.67 compared to earnings per share of $2.39 in Q4 2017.

Excluding special items, mainly the $188.6 million noncash and nonrecurring impairment charge related to the E-190 fleet and a $11.4 million onetime foreign currency adjustment that was included as part as our -- of our restated 2017 results, adjusted net income came in at $44 million or $1.02 per share compared to $2.11 per share in Q4 2017.

Turning to the balance sheet.

We closed the quarter with a very strong financial position.

Assets totaled $4.1 billion, owners' equity totaled $1.8 billion, debt plus capitalized leases totaled $2.1 billion and our adjusted net debt-to-EBITDA ratio came in at a very strong 2x.

By far, the lowest seen in our peer group.

Keep in mind that starting in 2019, the nature of this capital ratio will be changed with the adoption of the leasing standard IFRS 16.

We closed the quarter with approximately $1.3 billion in debt, more than 60% of which is fixed with a blended rate including fixed and floating rate debt of approximately 3.4%.

In regards to cash, short- and long-term investment, we closed the quarter with close to $860 million.

The reduction in cash balance during the quarter was driven primarily by the early retirement of a portion of our debt related to the E-190 aircraft.

Our cash balance at the end of the quarter represents approximately 32% of last 12 months' revenues.

In terms of fleet, we received 3 737 MAX 9 aircraft during the quarter, ending the year with a total of 105 aircraft.

The fifth MAX 9 originally scheduled for December as per our fleet plan, was delivered early in January.

Also in January, we executed the sale of the first Embraer-190 to Azorra Aviation.

During the rest of 2019, we expect to take delivery of 8 additional MAX 9s and finalized the sale of 4 additional E-190s, to end the year with the fleet of 109 aircraft, 13 737 MAX 9s, 68 737-800s, 14 737-700s and 14 Embraer-190s.

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

Finally, I'm pleased to announce that our Board of Directors has approved a quarterly dividend of $0.65 per share, corresponding to our dividend policy of 40% of prior year's adjusted net income.

The first quarterly dividend will be paid on March 15 to all shareholders of record as of February 28.

So to summarize, the fourth 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 be the most convenient for travel within the Americas with world-class operational indicators.

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

Today, we are also providing guidance for 2019 based on our operating plan and expectations for air travel demand for the year.

We're reducing our capacity growth in terms of ASMs to approximate 2%, and given the lower fuel prices curve for the year, we're increasing our operating margin range to 12% to 14%.

Our 2019 full year guidance is based on the following assumptions: load factor of approximately 84%; RASM of approximately $0.102; CASM ex fuel of approximately $0.062%; and a lower effective fuel price per gallon, including $0.28 of interplane expenses of approximately $2.15.

Thank you.

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

(Operator Instructions) Our first question comes from the line of Bruno Amorim from Goldman Sachs.

I have a question on your cash position.

I'd just like just to check with you if there is any of the countries where the currency has depreciated significantly in 2018, like Argentina, Venezuela, Brazil, where you have a significant cash position.

And if that is the case, what was the impact of the mark-to-market in the cash position?

And also, I have a second question on your capacity growth.

You have reduced your capacity growth guidance for this year slightly now together with the results.

Have you already made the adjustments that you had to make in the network in order to reach this new capacity level?

Or is it something that you're going to do throughout the year and therefore could have an impact not immediately but throughout the year on your pricing power?

Bruno, this is Jose here.

So in terms of cash, basically all of our cash is in US dollars.

So we don't really maintain amounts of cash in other currencies.

Once we perform our sales, we repatriate the currencies very quickly.

So there is very little impact in our cash balance related to that.

When you see the variation in our FX line, mostly it's translational aspects related to the payables and receivables in the particular countries, more than -- specifically cash transactions related to the currencies.

And in terms of the capacity, we've already started making some adjustments to the network, mostly for the first half of the year related to frequencies and markets in South America.

We've reduced some of our exposure to some of the deep south markets.

Again, mostly driven by frequency into markets that we already serve.

And so yes, the 2% at least for the first half, which is kind of the first part of the year, has already been out there and published.

And our next question comes from the line of Savi Syth from Raymond James.

I was wondering if you could share what the RASM declines were in Brazil and Argentina in the fourth quarter?

And with -- kind I take it in 1Q, still that so much stronger FX levels.

What's the trend that you're seeing currently, assuming nothing changes?

Savi, this is Pedro.

So in the fourth quarter in both markets, we saw in Argentina, industry sales were around 40% down year-over-year, and that was mostly yield.

Same with Brazil, with Brazil it was around 20% industry sales, agency sales are down in Brazil.

I mean, in that range.

And that was very similar to what we've been seeing in the first quarter also, and again, mostly yield.

However, we have seen in our futures -- in our current sales for future travel, we have seen network-wide improvement in yields, a gradual improvement in yields.

And more recently we're starting to see actually positive yields year-over-year.

But that's going to have an impact mostly in the second half of 2019.

Okay.

And then if I just -- regarding Venezuela, have you seen any kind of changes in the demand or supply there?

And just how you are thinking about it given the latest development?

Right.

So as usual, it's like a roller coaster ride.

So since the most recent crisis started, we have seen demand suffer quite a bit.

And in fact, we had scheduled additional capacity towards the end of last year, beginning of this year.

And we took out that additional capacity in this month of February to react to the lower demand due to what's going on there.

Yes.

Savi, one more thing here.

This is Jose here.

So Venezuela just in total, in terms of ASMs represents around 2% of our ASMs.

So it's a minor portion of the total capacity that we have.

I was just wondering if there was opportunity there given that potentially things could improve, but it sounds like it's not there yet.

Yes, not right now.

Yes.

Hopefully, it will improve in the future.

And our next question comes from the line of Duane Pfennigwerth from Evercore ISI.

I wonder if you could just expand a little bit on what you expect in the first quarter?

Do you expect a similar decline, a greater decline or less of a decline into the March quarter?

And if you could size the Easter shift as you see that in the first quarter?

Yes, Duane, I'd say that the first quarter is going be a difficult comp because Q1 of 2018 was very strong.

And so we're seeing a gap in a year-over-year basis in the low double digits, kind of low teens in terms of RASM on a year-over-year basis.

So that's how we're seeing it.

Having said that, as Pedro mentioned, I think we're starting to see, especially I think towards the latter part of the second quarter, some better, I think forward yields in our -- in the bookings that we're seeing.

So I think, that we are at least optimistic in the sense that perhaps towards the second half of the year we'll start seeing improvement on a year-over-year basis.

I appreciate that detail.

And then just for my follow-up, on the 190 fleet, if you had to guess, how much longer will you be operating those 19 aircraft?

And what is the carrying value on the fleet today after the write-down?

Right.

So I will take the first part.

This is Pedro.

By the end of this year, the Embraer fleet will be down to 14 aircraft.

We're selling 5. Well, we have sold 5, of which we have delivered 1 and there are 4 more to be delivered.

So we'll end the -- we should end the year with 14 Embraers.

We have not made that decision, a firm decision yet in terms of how long we're going to keep the Embraers or they're going to be replaced by similar 100-seaters or just operate a single Boeing fleet, a 737 fleet.

We have not made that decision.

We're looking closely at the numbers.

And we will make a decision that is positive to our net results, but we're not there yet.

Yes.

And in terms of the carrying book value of the fleet, it's basically between the high 80s in terms of millions of dollars.

So yes, that's kind of how it's left.

But there's spare parts and spare engines, et cetera, as well in there.

So there is some more components as well in there.

What -- the figure that I just mentioned is purely aircraft.

And our next question comes from the line of Hunter Keay from Wolfe research.

This is actually Mike on for Hunter.

So on a basic economy, you said that's going to be coming in 4Q.

Just a couple of thoughts on, if that's going to be limited to certain geographies, will it come out all at once, if it is going to be in varied -- like, all the buckets or just a couple of them.

Any thoughts that you're willing to share?

Yes, we haven't finalized what exactly it's going to look like.

So we know we're going to have the right technology.

We're implementing [prologic] technology, which should be implemented by the fourth quarter.

That's going to allow us to implement the basic fares, and that is something we're going to do.

We'll know exactly how it's going to look, but I would expect it to be in most markets for sure.

And we also expect a kind of very positive impact from being able to upsell -- promote upselling, but also more effectively sell ancillaries.

And our next question comes from the line of Helane Becker from Cowen.

It's actually Conor Cunningham in for Helane.

Is it safe to assume that the capacity adjustments are happening on the off-peak days?

And if so, can you just talk about the unit revenue trends for peak versus off-peak?

Yes, I think that -- yes, you can make an assumption that we are very aggressive in our capacity management during the low season periods.

But we -- what we've also done is shifted some of the capacity away from some of the Brazilian and Argentinian markets and put it to fly in other parts of that network.

So there's also a little bit of that as well.

So there's -- a part of the ASM shift has been driven by just simply a shift in the shape of the network, but also indeed there is a very active management of our capacity during low season periods.

And I would add to that, that some of our secondary Brazilian and Argentinian markets, 5 of those markets in both countries, have capacity reductions in Q1 year-over-year in the 20% range.

Okay.

And that actually kind of speaks to my follow-up.

Can you -- if you exclude Brazil and Argentina, how is the rest of your network performing?

I mean, obviously you're putting more capacity into new markets.

So is there a unit revenue headwind that you're kind of seeing there overall?

Yes.

So I'll say 2 things, maybe 3 things.

So in terms of capacity, we're actually slowing growth and that 2% ASM growth we're guiding to 2019 is pretty much across the board.

I mean, we're reinforcing capacity in some markets that are stronger, but not by a significant amount.

So it's pretty much kind of a network thing.

There are certain other markets that have not obviously collapsed like Brazil and Argentina.

They have not been subject to the currency devaluations and economic conditions, but that are under more capacity pressure.

Like for example, in and out of Colombia, Colombia to North America, to South America, to the Caribbean, there has been a lot of capacity growth, not by us, by others.

Also, from North America to Central America, there's been quite a bit of capacity growth, and we're talking from the middle of last year and including this first quarter.

So those markets are under more competitive pressure.

And, of course, yields have suffered.

Okay.

And then just a quick follow-up on Duane's question about the E-190 fleet.

Can you just talk about the earnings drag of operating 2 separate fleet types?

And if you do make a decision for that to go away, what would the positive impact be?

So look, when we -- if you notice of the Embraers, at least these 5 Embraers leaving, we were talking about there is a cash positive benefit of about at least $10 million per year related to the replacement of those aircraft with 737 capacity.

So we're very bullish about that.

And of course, there are further opportunities once the fleet -- if we decided the fleet goes away, we go to a sole fleet.

Yes, there is some complexity cost that will go away as well.

So yes, those are certainly advantages that we'll seek to do while operating just the 737 fleet.

And our next question comes from the line of Michael Linenberg from Deutsche Bank.

Just a couple here.

I guess, Jose, you just highlighted the cash benefits of removing the E-190s and the reduction in complexity.

Are there any markets there that you serve of the 80-plus markets today where if you get rid of the E-190s that the 737-700 is just not suited for that market?

I don't know if it's a Manaus or some of these flights that are less than daily?

Yes, I think that the first thing I have to say is that we have not made the decision, the final decision yet to exit the fleet.

So these are things that we are looking at very closely right now.

And of course, in light of what you mentioned of what is the impact of the E-190 in certain secondary markets, where that is the right size of aircraft.

So we are very carefully evaluating what the particular impact would be of that.

And it could be that if you decide -- you have to take into account that if you decide to replace the 737-700s for E-190 that you have to look at how demand would act and where the per trip benefit or profitability from a particular flight would -- will improve or not with the 737.

So these are very thorough analyses that we performed on an ongoing basis.

And we haven't finalized a decision, so I would have to say that that's something that we're still looking at.

Okay, great.

And then just the sort of second strategic type question, why the shift from the 737-700 to the 800 for Wingo?

Or was the 800 maybe the right airplane from Day 1, but you needed MAX 9s to come in to free up enough 800s to go into that business?

And sort of a related question, you indicated that you're going to base one of the Wingo airplanes in Panama.

Now is that Panama Pacifico or you're actually going to put a Wingo aircraft at Tocumen?

Right.

So this is Pedro, Mike.

Yes, the 800, we always knew the 800 was the right aircraft for Wingo.

It has the right seat capacity, and more importantly, it had the right unit cost for an airline like Wingo.

We started with the 700 for 2 reasons: One, that it would reduce the risk, the downside risk of an alpha startup.

And it did.

So the first year we did not have load factors that were so high that the 700 is not enough.

So it did reduce the risk and reduced losses during the first year.

And the second reason we started with the 700, because we knew we could switch fleet at any time because we have enough 800 and we have use for our 700 -- for 700.

Especially now that we've sold Embraer, so the Embraers we're selling, we're replacing with the Wingo 700.

So it's not a big growth in capacity.

So yes, the 800 is the right aircraft for Wingo and we're doing it now when we're confident about the load factors and the future demand for Wingo.

In terms of basing an aircraft in Panama, it's going to be in Panama Pacifico, where Wingo had all of its operations.

And it is actually going to take registering a new airline in Panama.

So it can operate in and out of Panama Pacifico with its own route rights.

Okay.

Should we assume that, that the airplane is going to be used for Panama to route to the south, which is mostly Wingo?

I mean, I know, I think you do fly Wingo up to Cancún and, I believe, Mexico City, or is this something where you're going to be looking more northward with the Panama-based aircraft?

Right.

So we think there -- I won't be able to give you a firm answer, but what I can say is, this is not an exact answer, but there are a few markets that can sustain nonstop point-to-point service from Panama.

The rest depend on connectivity, which is what we do.

So only a few can sustain, that's our opinion.

So Wingo is going to start operating at few of those markets.

And it could be to the north, it could be the south, that's totally open.

Where we see opportunities in those markets, where nonstop can be sustained, then Wingo might fly it.

Okay, great.

And if I could just squeeze in just one more, as it relates to IFRS 16.

I know most airlines are going to be moving over to that convention in 2019.

Presumably you will be doing that as well.

I know for some airlines because of the punitive nature of capitalizing at 7x, some carriers have actually seen an improvement in their balance sheet and leverage moving over to the new accounting standard.

I'm not sure, Jose, if you've done any early work on this.

What your initial read, whether or not you're coming out with a potential benefit from a deleveraging perspective by moving to IFRS 16, any thoughts or comments or is it still too early?

Yes, that's a great question.

Actually IFRS 16 is a mandated standard.

So everybody is going to have to move, even under -- regardless of whether you're under IFRS or under U.S. GAAP.

U.S. GAAP has that comparable accounting standard as well.

So all companies are going to have to go into this, not only airlines, by the way.

And yes, for us, we're doing still the work preliminarily and having discussions with the auditors.

There's a lot of debate in the industry related to the application of the standard.

But in our case, preliminarily we're seeing, yes, there is a deleveraging effect on the balance sheet related to the capitalization of leases.

And our next question comes from the line of Joseph DeNardi from Stifel.

Pedro, can you just to talk about, as it relates to Brazil, some of the key milestones politically or from a reform standpoint that you're kind of keeping an eye on over the next few months?

Just kind of gauge whether some of the enthusiasm down there is actually going to yield good positive results longer-term?

Well, I think you could probably tell me.

We're obviously hopeful, and we've seen how the currency has stabilized actually.

Since, like, the middle of last year, it's been pretty stable.

And the economy growth prospects for this year are close to double what it was in 2018.

So we think Brazil is going to recuperate much faster than maybe some people think.

We're seeing a little bit of that right now.

But we're cautiously optimistic.

There's still a lot going on, and I don't want to be the Brazilian expert, but we're cautiously optimistic right now.

Okay.

Yes, fair enough.

And then Pedro, if you look out 3 or 4 years, it seems like a significant amount of capacity between the U.S. and South America is going to be controlled by 3-or-so joint ventures.

And I'm just wondering if you can talk about how you think you fit into that longer-term?

Whether that's good for you or bad for you?

Yes, just kind of what are your thoughts?

And it seems like a very significant change occurring over the next few years.

I'm just wondering how you fit into that?

So as you know and as we announced in the latter part of last year, we joined and we signed a JBA, joint business agreement, with United and Avianca from Colombia.

That has to go for approval.

The approval process has not yet started, but it will start sometime this year.

And it usually takes upwards to 1.5 years or so to get approved.

So we're talking of end of 2020, maybe beginning of 2021.

Hard to predict.

But we're going to be part of 1 of the 3 major JBAs in Latin America.

And we think that will level the playing field.

And given our strategic position in Panama, right in the middle of Latin America, we think it's going to be net positive for us.

Yes, okay.

Pedro, I mean, if you think about the potential benefits of it, do you think it's stability?

Does it improve your returns that you get going to North America?

Does it allow you to grow more in North America?

You mentioned it kind of levels the playing field.

Maybe you can expound on that just because your returns are kind of better than everybody else's, so not sure what leveling of the playing field means for you guys?

Right.

What I meant by leveling the playing field is not being left out and not having, let's say, a United who's our major partner, even before we both joined Star Alliance, working with someone else.

And then the other major U.S. carriers working with some of our competitors and having that advantage of working together in the U.S. market and being able to cooperate in expanding your networks and offering more advantages to the passengers.

So we would probably -- given our -- the way our network is structured, which is basically international hub-and-spoke full service, we will be, in a way, left out of the benefit of working together.

And the benefits for the passengers also, so they would find probably more and more options in the other joint venture agreements or joint business agreements.

So that's what I mean by leveling the playing field, not having to work against a much greater entity.

So we're going to be at par, but we retain -- and this only applies to Latin America, to U.S., not to the rest of our networks.

And we will also retain our cost advantage and other efficiencies, including our world leading on-time performance.

So we will still be all of that, but network-wise and marketing-wise, we'll be able to have some advantages that we think are going to be positive going forward.

And our next question comes from the line of Josh Milberg from Morgan Stanley.

Just 2 quick ones for me.

The first is that you mentioned the shift in capacity away from Brazil and Argentina.

In some markets within those countries seeing cuts as big as 20% early in the year, if I'm not mistaken.

I was hoping you could just give a little more detail on that?

And also, maybe give an indication on what might be the full year capacity evolution in those 2 markets?

Because I was just trying to reconcile your point about potential cuts with the other message that the overall growth should be uniform across different markets.

Yes, sure.

This is Pedro.

I'll start and maybe Jose can pitch in.

So in terms of Argentina and Brazil, most of our ASM reductions or capacity reductions have been in secondary market.

So like 5, 3 secondary markets in Brazil, 2 in Argentina, we've cut about 20% ASMs in the first quarter of this year versus first quarter of the year before.

And overall, in those markets, even adding the other trunk routes, which are doing better, capacity is down in Brazil, is down in the high single digits, in Argentina is flat.

But I should say that right before the crisis in Argentina and currency devaluation we had grown quite a bit, opening destinations and adding frequency.

So we have pretty much brought back down all of that additional capacity.

And we will have flat growth this year.

And I think that complementing that, the growth that we're seeing or that we're shifting away from these South American, from the Brazil, Argentina secondary markets.

And granted, these are all frequencies that we fly into these markets.

The capacity that we're placing is mostly in the northern parts of South America.

So the fact that these are shorter station and flights creates a net reduction or a very slight growth in terms of essential flat year-over-year ASMs.

And that's kind of how we project the overall behavior of the ASMs throughout the year.

Actually, for example, in the first half of the year for the first quarter, we're expecting ASM -- overall ASM growth to be kind of in line with that 2% that we're guiding to for the full year.

And then Q2 might be flattish to slightly down, Q3 basically that one point flat range.

So that's kind of how the year is going to be overall.

Okay.

That was very clear.

And my second question relates to the Embraer fleet impairment charge.

It look like the impairment itself was boosted to around $190 million from the $160 million level.

And I just wanted to make sure that, that was right.

And also if it is right, what -- understand what drove that?

Yes, Josh.

So the prior figure that we had issued back was a preliminary figure.

And we're still performing a very detailed analysis around it.

And the only thing that we had concurrent with that was componentization of aircraft analysis related to the maintenance policy that we had.

So once we concluded both analyses, the impact on the 190 fleet was higher than what we had calculated initially.

So it was a little bit of -- kind of when both calculations were performed, a little bit more came into the E-190 impairment and -- versus the componentization adjustment that we had to make as well.

So that was the reason for it.

It was mostly a -- it was a preliminary figure, it's still under adjustment.

And our next question comes from the line of Dan Mackenzie from Buckingham Research.

Just going back to the revenue commentary.

The full year revised outlook probably for 2019 was a hair weaker than the last outlook.

And given the trim to capacity, I would have expected it to be just a little stronger.

So is the incremental weakness tied to some of the prior Q&A -- pardon me, that you've already answered or is it something new or is it really just a rounding error?

I'd say that it's mostly related, Dan, to the specific performance of the early part of 2019 of Q1.

And yes, these weren't sharp changes that we saw.

But yes, the unit revenue, I'd say, performance very close into the beginning of 2019 has been affected.

And yes, it's been a challenge in Q1.

But as we mentioned before, at December, we're seeing our bookings and the yields that are coming with our bookings, especially during the second part of the second quarter improving.

And even though they won't close the year-over-year gap for the RASM for Q2 we see definitely for the second half of the year a potential for improvement right now.

Yes, so basically the sales that are coming in right now for future travel are coming at better year-over-year yields, but obviously, we have sold maybe a good percent of the second quarter at lower yield.

But we've seen that throughout the year.

We have seen a gradually improvement in yields year-over-year, closing the gap we had at the beginning of the year.

And we're seeing positive trends for the second half of the year.

Got it.

And then with respect to those positive trends in the back half of the year that you're seeing.

Is that broad or widespread across all the network?

Or is that simply -- is it tied primarily to Brazil and Argentina?

It's overall.

It's pretty much the whole network.

There's always going to be ups and downs of positives and not so positive, but it's pretty much throughout the network.

Very good.

And then if I could just squeeze one last one in here.

The -- with respect to the commentary on lie-flat seats and the positive impact to yields that you referenced in the opening remarks, I'm wondering if you can just help us peel back the end a little bit there.

I'm just kind of wondering what percent of the flying do the premium seats represent today?

What percent -- pardon me, would they represent at the end of the year?

And what percent would they represent once you're fully up and running?

I'm just trying to get a trend rate for how this premium revenue would come in?

Yes, so right now it's very little.

I think it's 1% or 2%, something like that, very little.

It will be 10% by year-end.

And it will grow year-after-year, but it won't be, let's say, the whole premium network that will happen, I think, 3 or 4 years.

And even then, it's going to be maybe that will be a 1/3 of our flying, 4 years down the line.

So by the end of this year it will be 10%.

And our next question comes from the line of Victor Mizusaki from Bradesco BBI.

I have lots of questions about your guidance for 2019.

The first one, how much are you paying for jet fuel in the first quarter?

And the second question also about fuel cost.

How does this compare with your guidance, I mean, for this year, you're showing $2.15 per gallon.

So I'd like to understand, how much you are paying today and how does this compare with your guidance?

Yes, I think that it's really close to where we are right now.

I think it's in line with the full year, the $2.15 that we're seeing.

So -- and it's not -- it might be a little higher than what we have, but it's not significantly higher than what we are guiding for the full year.

Although, yes, they tell me -- you're seeing here, that it's basically about a $0.05 below the full year.

So for Q1, expected about $2.10.

And the full year is about $2.15, so it's -- but it's not significantly different from what we guided to.

Okay.

And I don't know if you can disclose this, but what's the WTI forecast to support the $2.15 per gallon for this year?

The -- yes, so the -- the fuel, talking about the jet fuel basis that we're using for the $2.15 is about $1.87 of jet fuel per gallon.

And that you add to that $0.28 of interplane fees, and that creates the $2.15 guidance for fuel.

And our last question comes from the line of Stephen Trent from Citi.

Just 1 or 2 for me, actually.

The first is a follow-up from Mike Linenberg's question.

When we think about IFRS 16, and we look at your margin guidance for this year versus last year's, any indication as to whether the accounting adjustment made a material difference?

Or can we assume that there is basically no margin difference because of the accounting?

Yes, Steve.

There is a tiny portion of the leases that -- the lease expenses that will become nonoperating, but it is really very tiny.

So I would imagine -- I would assume though -- I would just say that the guidance for 2019 has that IFRS 16 included in there.

But it's very, very minor on an operating versus nonoperating basis.

Okay, Jose.

I appreciate that.

And just one other last question.

Can you give us an update as to where we are now with Tocumen Airport south wing?

Okay.

So Steve, we have seen some progress there -- progress over the last several months.

We expect the first 4 gates to be operational in the month of April.

And we expect the terminal right now, I mean, is still under construction and there is still some milestones to be completed, but we're talking about something for the latter part of the year, Q4 of this year for the terminal to be fully operational.

Okay.

I think that concludes our earnings call.

Thank you all.

Thank you for being with us, and thank you for your continued support.

Have a great day.

Ladies and gentlemen, thank you for your participation.

That concludes the presentation.

And you may all disconnect, and have a wonderful day.