Copa Holdings SA (CPA) 2020 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 19, 2020.

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

Thank you, Sarah, and welcome, everyone, to our third quarter earnings call. Joining us today are Pedro Heilbron, CEO of Copa Holdings; and Jose Montero, our CFO. First, Pedro will start by going over the actions the company has taken to mitigate the impact of the COVID-19 crisis and the restart of our operations, 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 have been posted on the company's website, copa.com.

Our discussion today will also 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 subject to change. Many of these are discussed in our annual reports 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. I hope that all of you and your families are doing well and staying safe.

Before we begin, I'd like to thank all our coworkers for their commitment to the company and recognize their continuous efforts and many sacrifices during these difficult times. To them, as always, my utmost respect and admiration.

As expected, given government restrictions in the region related to the COVID-19 pandemic, we were not able to provide service for the first 45 days of the quarter. On August 14, after 5 months of virtually no operations, Copa was allowed by the Government of Panama to start operations with restrictions on the number of flights and the entry into Panama of noncitizens and nonresidents. We began with a twice-a-week operation serving 8 destinations. Since then, the company has been gradually spooling up its network, restarting destinations and adding frequencies as quickly as the easing of restrictions and air travel demand has permitted. We ended the quarter with service to 15 destinations. Although September only amounted to 3% of precrisis capacity, the gradual restart of flights allowed us to become even more proficient in the new, more complex operating procedures and enhanced biosafety protocols and to demonstrate our readiness to operate safely and reliably.

On October 11, the Panamanian government restrictions on noncitizens, nonresident and number of flights were lifted, which, as expected, had a positive effect on our ability to continue both building up the network, ending the month with service to 30 destinations, representing close to 15% of ASMs compared to October 2019. We project to end the year having restarted service to more than 50 destinations and plan to operate in December approximately 40% of 2019's capacity.

In August and September, while the restrictions on inbound Panama traffic were still in place, load factors were approximately 60%. In October, after the above-mentioned restrictions were lifted, we saw healthier loads, approaching 70% for the entire month. Based on the slowing traffic over the past 3 months and the bookings we're receiving for the near future, we believe demand will be able to sustain our current capacity plan for the remainder of 2020.

In terms of financial results, with only 1.5% of our precrisis capacity, this was a very challenging third quarter. We recorded a net loss, excluding special items, of $121.6 million, making this our second quarterly loss on an underlying basis in 20 years with the other being the second quarter of this year. However, by exercising great cost discipline and a better-than-expected sales and refund performance in the quarter, we were able to keep our cash consumption well below our original expectations to about $36 million per month.

Despite the encouraging progress in the vaccine development efforts, we continue preparing for what we believe will be a challenging 2021 as our region could still be subject to new infection rates with the possibility of further travel restrictions and a weakened demand environment, especially while we wait for the vaccines to become widely available. That being the case, we have taken many steps to strengthen the company and maintain one of the strongest financial positions in the industry. As of today, we have adjusted the size of the company to better match our future capacity and continue working on cost-reduction efforts as we believe keeping a competitive cost structure and a strong financial position will keep us among the best procurements to come out ahead once this crisis is over.

We have delivered the first 4 Embraer aircraft to the new owner and expect to have delivered the entire fleet by June 2021. We signed a letter of intent to sell the first 2 Boeing 737-700 and continue actively marketing the remaining 12 aircraft. We have a plan in place to comply with all new requirements and return our 6 Boeing 737 MAX 9 aircraft to service, allowing us to offer a more competitive product in our longer segments. We're also in advanced discussions with Boeing and expect to reach a settlement agreement soon.

Regarding our expiring leases, we have agreed to extend some of our leases on a power-by-the-hour basis, which adds even more flexibility to our fleet plan in case the market recovers faster than expected.

And in terms of liquidity, we obtained new credit facilities for an aggregate amount of $155 million, bringing our total committed undrawn credit facility to $305 million and total available liquidity to $1.3 billion at the end of the quarter.

Lastly, I'd like to reiterate that we have a proven and very strong business model, which is based on operating the best and most convenient network for intra-Latin America travel from our Hub of the Americas, leveraging Panama's advantageous geographic position with the region's lowest unit cost for a full-service carrier based on time performance and strongest balance sheet. Going forward, the company expects that its Hub of the Americas will be an even more valuable source of strategic advantage. It's likely that fewer intra-Latin America markets will be able to sustain direct point-to-point service, so we believe the Hub of the Americas will be the best positioned to serve this market.

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

Thank you, Pedro. Good morning, everyone. I hope that you and your families are safe and doing well. Thanks for being with us today.

I'd like to join Pedro in acknowledging our great Copa team for all their efforts and great team spirit during these very challenging times.

As Pedro mentioned, we restarted scheduled commercial service in mid-August and has slowly been spooling up capacity ever since. For the third quarter, the contribution from these operations was still very modest as we only operate in about 1.5% of the capacity compared to the same period last year. Nonetheless, we finally started flying again, and we've put a lot of effort into rebuilding our hub and look forward to having more substantial operations in the fourth quarter.

Looking at third quarter results, we reported a net loss of $118.1 million or a loss of $2.78 per share. Excluding special items, mainly the realized $3.6 million mark-to-market gain related to the convertible notes, we would have reported a net loss of $121.6 million or a loss of $2.86 per share.

Our cash consumption for the second quarter came in at $36 million per month. This excludes $22 million in proceeds mainly related to tax credit reimbursements as well as the sale of 1 Embraer-190 aircraft. It also excludes a $50 million payment we made on a short-term credit line. This cash consumption is significantly lower than our prior estimates as we delivered more savings than planned and generated a higher proceeds from sales and lower cash refunds than we originally expected.

In terms of capacity for the remainder of the year, we expect to continue spooling up our operations. October came in at approximately 15% of October 2019 capacity, and we expect November and December to approach 30% and 40%, respectively, year-over-year. Assuming this gradual spool-up of our operations, we should be able to keep our cash consumption to about $25 million per month for the fourth quarter of the year. This figure assumes that our leased aircraft and debt commitments are paid in full and we stay current in all of our obligations while not including the proceeds from aircraft sales. The improvement in our cash consumption estimate for the remainder of the year is a function of our sharp focus on the reduction of our cost base as well as improving sales figures, which are on pace with the projected spool of our operations.

I'm going to spend some time now discussing our balance sheet and liquidity. As of the end of the third quarter, assets totaled $3.9 billion. Owners equity was almost $1.5 billion. Our debt plus our lease liabilities totaled $1.5 billion. And our lease liability adjusted net debt-to-EBITDA ratio came in at 2.2x. We closed the quarter with approximately $1.2 billion in debt. As I mentioned before, during the quarter, we repaid $50 million of our short-term credit facilities. And currently, all of our committed credit facilities remain undrawn. As to cash, short- and long-term investments, we closed the quarter with $1 billion.

During the quarter, we took many steps to further strengthen our liquidity position. As previously reported, in the month of July, we closed a secured revolving credit facility for an initial aggregate amount of $105 million. And in the month of August, we established a new unsecured committed facility for $50 million, which remains undrawn. Including these and other previously established facilities, the company ended the quarter with an aggregate amount of $305 million in unutilized committed credit facilities, which added to our cash equates to more than $1.3 billion in total available liquidity.

During the quarter, we finalized the sale and delivery of the first of 14 Embraer-190 aircraft. As of today, we have delivered 3 additional Embraer aircraft and expect to have delivered the entire fleet by June 2021. This month, we also signed an LOI for the sale of 2 Boeing 737-700s, which we expect to deliver during the month of January of 2021. Aside from the E-190 and 737-700 fleets, which are classified in our balance sheet as assets held for sale, we ended the quarter with 74 aircraft: 68 737-800s and 6 MAX 9s. During the month of December, we expect to receive 2 MAX 9 aircraft to end the year with a fleet of 76 aircraft. Including these figures are 16 737-800s, which will remain in temporary storage.

Let me close by saying that once this most challenging situation passes, we believe Copa's Hub of the Americas will remain as the best-connecting point for travel in the region with a privileged location, an even more efficient business model with lower costs and the best team in the industry.

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

(Operator Instructions) Our first question comes from the line of the Duane Pfennigwerth with Evercore ISI.

Can you talk what percentage of your markets are open now, not necessarily the markets that you're flying because that could be a subset of that, but what percentage of your markets are you technically able to fly to? And then, generally speaking, what are the entry requirements, for example, you have to present with a negative test or whatever, what are the entry requirements? And can you highlight any recent changes? So just to give us a sense for the number of markets that are reopening and what sort of entry requirements are in place.

Okay. Duane, this is Pedro. So one of the challenges we're all facing, and when I say we are, meaning like aviation worldwide, is that countries are all over the place in terms of their entry requirements. So in terms of open market, I would say most of them are open in one way or another. Mostly are 100% open. There's orders that are restricting the number of flights they are allowing or restricting slots.

For example, Colombia is restricting the number of flights per hour, so there are only so many slots available. And other countries are still restricting the entry of nationals and residents versus foreigners or visitors. Some countries are requesting a PCR negative test within 72 hours. Others have recently lifted their restriction like Costa Rica and Colombia. So it's all over the place again, but I would say, in summary, most countries are open.

And then, I totally appreciate it's early days here, but is there any relative trends you could highlight, markets where maybe you've been surprised at the level of demand recovery in a positive way versus markets that remain very restrictive?

Yes. It's hard to tell. There's -- once a new market opens -- well, it's not a new market, but once a market reopens, there's always pent-up demand that needs to be satisfied. It's usually VFR traffic, so people needing to get back or visit families or personal reasons in general. So I would say no big surprises there. We're starting to see leisure traffic picking up a little, like from South America to the Caribbean. Obviously, it's a fraction of what it used to be, but it's starting to pick up a little. And although business traffic is the weakest right now, we're also starting to see companies and -- companies that need to get their executives back in the air, visiting their markets. And so there's a little bit of that story, but it's mostly VFR still.

Our next question comes from the line of Alejandro Zamacona with Crédit Suisse.

On the cash burn management, during the second quarter, you reported a monthly cash burn of USD 77 million. For this third quarter, we saw a monthly cash burn of $36 million, so it's a significant improvement. So I'm curious on what's behind this significant decrease or what additional initiatives are you deploying to deliver this improvement.

Yes. Alejandro, this is Jose. There's, I would say, 3 components to the improvement that we saw in our consumption of cash for the third quarter. The first one is, of course, costs. We've been very focused since the onset of the crisis in reducing our costs to a greater extent in negotiating all the contracts that we had. We have also, frankly, reduced the size of the company to match the size of the new reality that we expected, and this was done through offering packages for a subset of our employees and offering also voluntary unpaid leaves for employees as well. But in essence, we looked at every single cost base, and I think that we've been able to accelerate some of the improvements that we initially expected or that have been seeing in the second quarter into the third quarter and beyond.

The second one is our -- we've seen, I think, a reduced number of cash refunds than we expected. And that's, I think, is a function of the policy that we've set in place for -- to make more flexible the travel date for our customers, and that has resulted, I think, in a significant reduction in our ATL refund reduction.

And then finally, we are seeing a better-than-expected sales coming in during the quarter. And I'd say those are the 3 main sort of levers for our improvement and also our improvement going into the fourth quarter as well.

Okay. Very clear. And if I may, a second question, just -- can you give a quick update on the densification plan announced in the last Investor Day?

Yes, it's Pedro here. With the pandemic, our investment were pretty much frozen on that -- of an essential nature, so those are projects that we have to take up again, and we're starting to talk about those projects. So that was put in freeze, and we haven't really done much. We went into lowering CapEx and saving cash, but -- and of course, load factors are down, and demand is weaker, so we don't have the same necessity to rush into higher-density planes. But I think that will happen eventually, and we'll pick it up again, but that was delayed.

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

This is actually Matt on for Savi. I appreciate the color you provided with expectations of 4Q demands going up with capacity. But could you maybe provide a longer-term look? I know we've had a lot of vaccine news out recently as well. But what are some of the potential capacity recovery paths that you're considering for 2021?

Yes. So it's -- one of the most difficult things right now is talking long term because the booking curve has shortened, and we are navigating unchartered waters. It's all new. But there are, of course, very encouraging news with the vaccines are coming out, so it seems like there's a bright light at the end of the tunnel. And there will be a point, hopefully soon, when it's going to be a lot easier to predict future demand.

However, for December, for the end of this year and the month of December, we are talking now about 40% of ASM versus 2019. While in the previous call, we were talking of a range between 30% and 40%, so we're in the upper side of that range, and that's a good sign. And as I mentioned, our bookings support that ASM level, so our bookings make us believe that we can sustain those ASMs with decent load factors. And we think that from then on, where we hope from then on, to build our ASMs gradually as demand allows us.

But January, will be a little bit better than December in terms of ASM, not a lot but a little bit better. Beyond January, bookings are not strong enough to know, and there's so much uncertainty out there with the virus and everything else that it's just very difficult for us to say anything beyond January.

I would say that you could argue that it's going to be in that range of time that Pedro just mentioned, somewhere in the low 40s of pre-COVID capacity. I say that the other component of that is just simply for us to maintain our flexibility, and I think that we've been working quite a bit in terms of flexibility that we have in 2021. But it is still premature as you could probably imagine to say anything related to the full year of 2021.

Certainly, anybody's guess, but I appreciate the color, nonetheless. And for my second question, looking at your fleet plan, it seems like with the 2 additional MAXes coming in December and 5 remaining but not yet delivered, it seems like you can get back to just about 95% of 2019 capacity in 2021 if you wanted to. So can you provide a little bit more detail around your expectations around the 800? I know you said you had some of them on the power-by-hour agreements. Could you maybe talk about redelivery expectations or just some more color on the duration of those power-by-hour agreements or how many that pertains to?

Yes. There's been a -- some negotiations that we've been making over the last couple of months with some of our leased airplanes. They give us a lot of flexibility because that flexibility kicks right away. So we extended some of the expiring leases that we have for -- in the 2021 range. And actually, over the next 2 years, we have about 11 leased airplanes that are going out, and so we can gain some flexibility with these power-by-the-hour agreements that we're doing.

Having said that, in terms of number of aircraft that you could expect for next year at the end of the year, it will be in the mid-80s in terms of total number of aircraft. And so as I mentioned in I think in my prepared remarks, there's a portion of them that are going to be in storage, so I think there's going to be a range of possibilities in terms of the available number of aircraft that we have in the network for next year, depending on how demand ultimately behaves.

And just to add to that, we have a sizable order for MAX aircraft, and I'm sure we can work with Boeing if there's any need to change delivery dates. I mean there'll always be the production issues, but we think we have enough flexibility with the leased aircraft, the starting leases that could be renewed, the power by the hour, the stored aircraft and our March -- our MAX order where we can adjust capacity as needed, and it could be upwards or downwards depending on how the market behaves. So that's -- I think that's what -- one thing we've been able to manage very well.

Our next question comes from the line of Helane Becker with Cowen.

Not sure you can talk about this, but is there a specific sticking point with respect to the negotiations with Boeing? Or is it just taking a long time because it's hard to get back and forth?

Yes, there's no sticking point. And yes, I mean, it's just the way it's happened. It's not -- maybe neither side has been in a big rush. It's not like we needed money to survive and we want to agree to the right deal, knowing when the airplanes are going to be back in service or facilitate things. So no, it's just the way it's worked. It's -- yes, I don't think I have much to add to that.

Okay. Well, that's a fair response, actually. And then I was just wondering if you could talk about what you need to do to return the MAX to service now that the U.S. FAA approved it. Can you just maybe update us on what has to happen now?

Yes. We have 6 MAXes in Panama, grounded in Panama. And then there are 7 that were built but not delivered. Those are somewhere in Seattle. We expect to be flying at least 2 of our 6 MAXes by the end of this year. That's our expectation right now. And there's a series of, let's say, technical matters like upgrading the new software, uploading the new software that -- it only takes a few hours. We have to retrain pilots because they haven't flown the airplane for a while. However, I should say that the new training requirements are basically the same that we were doing before the aircraft was grounded. Copa was always -- had always done more than what the minimum required. We had the MAX simulator. We're doing the simulator sessions. So the new requirements are basically the same we were doing before that. That's not a problem, but we have to put the pilots through that training program again.

Then maintenance-wise, it's going to take us like about 2 weeks per aircraft to bring them up to the right maintenance level, which includes doing a few flights without passengers, a few test lights without passengers to make sure all the dogs are out. When a flight -- when an airplane has been grounded for nearly 2 years, and that's not what they're built for, there's a lot of maintenance work, even though we've been preserving them following Boeing's recommendations.

One thing I'll add there, Helane, as well is that Panama Aviation Authority, of course, follows what the FAA has issued. So from the regulatory standpoint, that's something that facilitates also the process once that this has been lifted by the FAA as well.

Our next question comes from the line of Hunter Keay with Wolfe Research.

So on costs, you've shown an impressive amount of variability as you've been cutting capacity. How do you think about those coming back as you slowly add capacity back? I mean trying to think about the balance here between what's been sort of deferred and what's truly variable in nature and then thinking about maybe incremental efficiencies that you could drive from some operating leverage. It's really ultimately just a question about when we can start talking about that Sub-6 and CASM number again. So any color on that would be appreciated.

Okay. Hunter, yes, so it's Pedro here. I'll start to give Jose a little bit of time. But first thing I should say that we haven't deferred any cost, and that's very important. The costs we're showing are our complete costs for the month or for the quarter. Nothing is going to come back to bite us later on. And no leases, no nothing. We're paying for everything. We have renegotiated a bunch of fixed costs, plural number of contracts. We have brought down our fixed cost, as Jose mentioned before. And then, of course, the variable costs, they are down because of volumes. So we expect that as ASMs come back, our unit costs, of course, are going to improve. And our plan and the way we have approached this crisis is that when everything is over, we're not sure what's going to be our site and how long it's going to take us to get back to 2019 levels, but we want to make sure that we can be as successful as before, even before we get back to 100%, which means that we need a lower fixed cost base to be able to accomplish that. And I think we're there already.

Yes. No, Hunter, we -- the way that I'm seeing it is that when we are back to 80% of pre-COVID capacity, okay, we'll be back at the CASM that we had back in last year. So I think that we have found significant levels of efficiencies in this exercise that we've been making over the last several months. And so we're, I think, in a good place right now in terms of costs. Of course, that's not going to come in while the ASMs are still at a relatively low level. But once the ASMs are again back to around that level, some 80% of pre-COVID levels, we'll be achieving our sort of around 6 CASM ex-fuel that we -- were embarked on before.

Wow. And then you mentioned a little bit of green shoots on corporate travel. Obviously, it's still early. But I also think you mentioned previously that about 1/3 of your volume was corporate travel before. Is that true? Is it 1/3 of your volume? And then the second sort of component of that question is, when will you know how your corporates are thinking about their 2021 spend? Is that a January conversation? Are you having those conversations now? Because I would imagine there should be some degree of visibility on how your corporate -- your structured corporate stuff should spool throughout the year.

Yes. So I'll start with the second part. So we have started those conversations, but our corporate accounts don't really know what their travel plans will be for next years. And -- but in most cases, people want to get back in the air. It might not be to the same degree as before, but pretty much everyone wants to get back in the air and get back to doing their regular business, and I think that also applies to people who have been locked at home for so many months that want to go out and travel for leisure or for visiting friends and family.

So -- but in terms of our traffic, it's -- the way we've grown in the recent past, we've ended up in, I would say, 1/3 VFR, 1/3 leisure and 1/3 business, not just corporate but business. Corporate is much more modern, but business in general. In Latin America, not everything business, meaning that it's corporate. It's a lot of smaller companies that don't have corporate accounts, but it's 1/3 each.

Our next question comes from the line of Rogério Araújo with UBS.

A couple of questions here. The first one, is it too early to map out opportunities left by competitors that are shrinking capacity in some of Copa's market? And can domestic market in Colombia become more relevant in the future? So we saw already like a decade ago, the Colombia domestic market was pretty relevant to the company, and this has reduced over time until you brought Wingo. So could this be an opportunity? And any other potential opportunities left by the market? That's the first question.

Right. So the -- it's too early to tell. Every earning, it's pulling up in a -- at a different pace for different reasons, including restrictions in their home markets, et cetera, so it's very, very hard to tell right now which opportunities are going to be left open in the future. But we do believe that a number of markets will not be large enough to sustain direct point-to-point service, as it was the case before. Those -- I mean, pretty much every market will be reduced for the next few years, so there's a number of markets that are going to fall below that minimum level for direct point-to-point. So there will be some opportunities for the hub to have even more value, but it's early to know.

In terms of Colombia domestic and Wingo, I think wind will remain opportunistic. That's a very competitive market, so we don't see Wingo just going in a while and trying to grow with aggressiveness. I think we will remain opportunistic and careful in how much we grow and where we grow. But Wingo did get a fifth airplane recently. We have extra planes that we don't need right now, so they've got a fifth plane. And they will get a sixth plane by the end of the year, so in a few months, so -- actually, in a month. So they have extra capacity, but they will deploy that capacity, again, as I mentioned before, with a lot of care, where it makes sense. And even if their utilization is down for a while, we're fine with that. Okay?

Yes. Very clear. So my second question is on connectivity. So how the lower number of flights impact the connectivity -- the connection time for the passengers? Is there like a -- are you mapping out the connection time -- the average connection time with passengers now versus before? And also, there was an increase in the maximum number of hours that a passenger can wait in Panama from 6 to 12 hours. How does this change the demand? So was this a huge restriction before when it was settled at 6 hours? So if you could speak about that connectivity with lower capacity would be great as well.

Yes. Well, the minimum hour to connect, that was lifted, so that restriction is not there any longer. So we were back to whatever we had before. And we've flown so little up to now that the priority has been just providing connections where we're flying, not worrying about how long that connectivity is. And there's so much lack of service in most of our markets that passengers will wait as long as it's needed to make their flight. So that's not -- short connections are not a priority right now until we build back to something like what we had before.

Our next question comes from the line of Bert Subin with Stifel.

You mentioned in your prepared remarks that you think you will come out ahead after the pandemic. What do you see as the single greatest opportunity that Copa has in a post-vaccine world?

So what we meant by coming ahead, I would summarize it in 2 aspects. First is what Jose mentioned a few minutes ago about lowering our fixed cost to a point where we could be as successful as before with much lower ASM. Which means that as we increase ASMs to a level more similar to 2019, we will do better than 2019. So that's number one when we -- what we mean by coming out ahead, so a better cost structure. And number two is the value of the Copa Hub of the America advantage in a marketplace where a lot of markets will not be able to sustain a direct point-to-point service, so our hub will be even more valuable. So I would say those are the 2 things that we're looking at.

Okay. Yes, that's helpful. I know this is a smaller part of your business, but have you seen any opportunity in the cargo market just as capacity has been significantly curtailed across both South and Central America? Or do you sort of expect that to just come back like it was last year?

We -- most of our cargo is daily cargo. We don't operate freighters, although we might do ad hoc freighter charters here and there, but we do not operate a freighter aircraft. So the opportunity in the cargo market right now are limited.

Our next question comes from the line of Dan McKenzie with Seaport Global Securities.

Going back to the commentary of a challenging 2021 because of the region could be subject to further travel restrictions, is the -- is that concern tied to the timing of the rollout in vaccines in key end markets? I'm wondering what you can share here. And just related to this, going back to kind of your thoughts on corporate travel, I know accounts can't share what they're doing or what they're going to do right now. And I know people want to get back in the air. But I'm just wondering what you can share about your starting assumptions as you think about planning for 2021, maybe your best estimate of what it could look like.

Yes. So I think -- Dan, I think it's correct to think that we're being very careful and conservative in our assumptions because we don't really know, and there's still risk out there. The vaccine news are very encouraging, but we are unsure of how long it's going to take for the vaccines to be widely available, especially in our region. So will that happen in mid-2021 or towards the end of 2021, it's really hard to tell. And in the meantime, anything can happen. Like we've seen in the U.S. and in Europe, we've seen the second wave and the effect that it had on air traffic in the U.S. and Europe. So we're being careful and we're being conservative as we usually are. I would say that's kind of what you're seeing in the numbers we're sharing.

And keeping flexibility open. I think that, again, the other thing is flexibility then it's critical for 2021.

Understood. And I guess, just related to VFR traffic, what can you share about the people that are willing to travel right now? So kind of their profile or demographic, are these primarily millennials that just don't care about the virus? And I guess, kind of where I'm going with the question is, I'm just wondering, do we get to a place where demand plateaus at, say, 50% until vaccines are rolled out? Or is the thought, as you think about 2021, that the recovery, and this goes back to your response to a prior question, that it could just increase kind of at a steady clip or steady rate each month sequentially as we move forward?

In our 2021 thinking, I would not even call it a projection, but in our 2021 thinking, we're assuming that there is a plateau before the vaccines are widely available. That there will be a plateau. We just don't know at what level we're going to hit that plateau, but we are expecting and we're planning for that. We've seen it in other parts of the world. People want to travel. And actually, I'm surprised on a positive way by what people tell me. But still, that's just a percentage. So where's that plateau, that's the big question, and that's why, again, we're being so careful.

Our next question comes from the line of Mike Linenberg with Deutsche Bank.

Two questions here. So as you indicated in the release, you hit 38 destinations in November, and I think, Jose, I heard you say 50 by year-end. Pre-COVID, I think you were at 80 destinations. And the reason I'm sort of bringing this up is that you made this decision a year ago to get out of your 100-seaters and your 124-seaters. So if your small shell is about 160 seats or so, plus or minus a few, when we look at -- when that decision was made, I suspect that you probably thought that maybe a few of the cities would lose service given the size of the gauge or maybe it would lose frequency, maybe it wouldn't make economic sense. With COVID now and the impact that, that has had on demand, does that -- has that led you as an organization to maybe reconsider operating a smaller aircraft, maybe a 737-7 MAX, for example? I realize that, that goes against the grain of what you want to do from a unit cost perspective. But it would think that by getting out of these smaller shells that you're going to preclude yourself from serving more than just a few of the 80 cities that you serve pre-COVID. Thoughts on that?

Yes. So my -- first thing I'll say is that we're very happy with the way we have simplified the fleet and how quickly we've been able to do that. We're very happy. I mean obviously, our flight operations scheme is even happier. The maintenance team is delighted. And our costs are going to also be better with a simplified fleet and a larger gauge, so our unit costs are happy also.

The finance team is also delighted.

The finance team is also -- everybody's happy. I would argue, as you will say, there will be some smaller markets than, on paper, could suffer. Our plan is: one, our pre-pandemic plan or our current plan or whatever you want to call it is that we can adjust frequency as needed in some smaller markets; but also, usually, our small markets where we don't serve that many frequencies are mostly leisure. And leisure can be stimulated with pricing, and a larger-gauge aircraft can allow us to offer much better pricing because that's much lower cost. So we think with those things, adjusting frequency and pricing for leisure, we can make the capacity work. And actually, the financials should work better also.

All right. Now that makes sense. And then just my second question on the power-by-the-hour agreements that you entered into. You've been very good or you've been a bit of a standout when it comes to meeting your liabilities, making your payments, not deferring aircraft rent. Up until this point, any call that at least I've been on, these power-by-the-hour deals were ones that were initiated by the lessees who are coming from a point where, call it, their negotiation leverage was somewhat weak, and they needed some assistance. I get the sense from the conversations or what went on here is that this was from a point of strength where the lessors came to you and realized that they didn't want to have all these 737-800s coming back. And so as a company, you were able to extract something very attractive to you from an aircraft ownership perspective. Is that the right interpretation here?

Well, Mike, I would say that it was a mutual discussion, and we've been having discussions with our lessors for the last several months. And the one thing is that, yes, I think it was a win-win in the sense that, yes, they don't get an airplane drop in a very difficult moment for them. And at the same time, we win by the fact that we get immediate benefits from this negotiation that we made. So I say that it's -- it was a win-win for all involved.

And Mike, Pedro here. Our lessors are probably bullish and feel that much better in having those planes start with no clients, which having ALPA continue taking good care of the plane and probably bullish in the sense that maybe the recovery. In their minds, they'll come sooner, and those hours are going to be flown and paid for, so it's a win-win, Jose is mentioning.

That's great. Can I just one quick -- squeeze in just one more on just the Boeing negotiation? And this is just from a modeling perspective, as we think about your cash out over the next year or so. Some carriers have discussions with Boeing. We've seen some where the net result has been a future benefit as it relates to ownership cost. For others, we've seen them receive 1 or multiple payments, what they call vendor support or vendor payments in return. Is there anything that you can tell us, at least from a cash-modeling perspective, what we should anticipate with respect to the agreement with Boeing?

Yes. Mike, I'm not going to get into the details of the nature of the negotiations because they are of confidential nature. One thing is that is not included in our cash flow projections that we've shared with the market, and our expectation for cash consumption do not include any assumptions of anything related to Boeing. I mean we've been very, very keen on making sure that we project our cash consumption in a very straight way, so we're not adding sort of these extraordinary items into it.

Our last question comes from the line of Stephen Trent with Citi.

I just had 1 or 2 quick follow-ups, if I may. When we think about Copa's passenger flow overlap with the likes of Avianca or Aeromexico, sort of what sort of overlap did you guys have on a pre-pandemic basis, just thinking about your trunk route exposure?

I think with Avianca, we have the most overlap. The Bogotá hub and the Panama hub have the most overlap versus others. But destinations out of Panama were close to twice the number that are served from Bogotá, so we had that advantage. But those are the 2 that -- the 2 hubs that overlap the most.

Great. I appreciate that, Pedro. And just one really quick follow-up. And I know it's early days, and I know there are a whole bunch of moving parts here, but when you think about longer-term opportunities, how are you thinking any differently with respect to potential M&A or with respect to down the line setting up that joint business agreement with United Airlines? Just sort of wanted to take your temperature on those opportunities, if I may.

Yes. I mean the joint business agreement, it was never filed, but it's still a possibility, of course. It hasn't been ended either. But as we know, Avianca is in a Chapter 11 process, so that kind of throws everything overboard. And so we have to not necessarily start from scratch, but we take those conversations when they have their -- when they understand their future better when the Chapter 11 proceedings are more advanced. So we expect to continue those conversations at some point, but hard to tell what's going to happen right now.

This concludes today's question-and-answer session. I would now turn the call back to Pedro Heilbron for closing remarks.

Okay. Thank you, all. This concludes our earnings call. Thank you for being with us. Thank you for your continued support. If you want to talk again, have a much better end of the year than what we have experienced in the last few months, and have, of course, a great day and a great weekend. So hope to see you soon. Thank you.

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