Copa Holdings SA (CPA) 2020 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Copa Holdings first quarter earnings call. (Operator Instructions) As a reminder, this call is being webcast and recorded on May 7, 2020.

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

Thank you, Crystal, and welcome, everyone, to our first quarter earnings call. Joining us today are Pedro Heilbron, CEO of Copa Holdings; and Jose Montero, our CFO. First, Pedro will start with our first quarter highlights, followed by Jose, who will discuss our financial results. Immediately after, we will open 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 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 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 first quarter earnings call. I hope that all of you and your families are doing well and staying safe.

Today, we won't spend much time going over our first quarter results, and we'll focus mostly on the COVID-19 crisis and the many initiatives we have undertaken to assure that Copa is one of the best-positioned airlines to survive and prosper in a post-crisis world. Before we begin, I'd like to thank all of our coworkers for their commitment to our company and recognize their efforts and many sacrifices in response to this crisis. To them, my utmost respect and admiration.

We delivered strong operational and financial results for the month of January and February with operating margins above 20% for the 2 months. However, in the second week of March, we started seeing a significant and rapid deterioration in demand as the first COVID-19 cases were detected in our region. Furthermore, to slow down the outbreak, many governments, including Panama, imposed significant travel restrictions, which eventually led to the suspension of all our commercial flights on March 22.

During the first quarter, passenger traffic decreased 16.3% year-over-year on a capacity reduction of 14.4%. This resulted in an 81.5% load factor, 1.9 percentage points lower year-over-year. Yields came in at $0.128, 5.8% high than in the first quarter of 2019. On the cost side, ex fuel unit cost came in at $0.066 or 8% higher year-over-year as a result of the significant cancellations in March due to the COVID-19 outbreak and later in the month, the suspension of the company's flights, resulting in a significant year-over-year capacity reduction. Our operating margin for the quarter came in at 16.6%.

I'll now address some of our actions in response to the COVID-19 crisis, focusing on liquidity initiatives, capital preservation, network and fleet plans and adjustments to our product.

Even though we began the quarter with a strong cash position with so much uncertainty regarding the long-term economic impact of this crisis, the timing and shape of the eventual recovery and the future availability of other liquidity sources, one of our main and immediate priorities was to further strengthen our liquidity. In March, we drew $144 million from unsecured short-term credit lines. In April, we obtained additional unsecured, committed credit facilities for an aggregate amount of $150 million. And on April 30, we closed an offering for $350 million in senior unsecured convertible notes maturing in 2025. We continue working on additional liquidity sources, which Jose will provide more details on.

In terms of capital preservation, we have canceled or deferred all capital expenditures that are deemed nonessential to our operations. Our Board of Directors has postponed the dividend payment for the remaining quarters of 2020. We're working on cost reduction initiatives, including renegotiating our main supplier contract and reevaluating our entire fixed cost structure. Most of our employees used their vacation time during the first month of the suspension of flights. Over 800 employees have opted for retirement or voluntary separation packages and more than 700 have taken voluntary 6-month or 12-month unpaid leave. And for the month of May, more than 90% of our management and administrative workforce has taken a voluntary 50% pay cut.

In terms of our network and fleet plans, assuming there are no further extensions to the air travel restrictions in Panama, we plan to restart our operations on June 1 with a scaled-down schedule equivalent to about 12% of our June 2019 capacity. Our current plan is to gradually pool up our network so that by December 2020, we're at about 40% of December 2019 capacity. We will adjust this plan according to market conditions and intend to only schedule flights that can, at a minimum, cover variable expense. We continue negotiating with Boeing and expect to reach an agreement on fair compensation for the MAX grounding and a delivery stream that takes into account the post-crisis reality. We continue with the plan to sell our 14 Embraer-190 and are now evaluating the retirement or sale of our 14 737-700s as when we restart flights, we intend to focus our operations on a simplified fleet, consisting exclusively of Boeing 737-800s and MAX 9s.

We're also adjusting our product to ensure we meet our customer needs and expectations, including establishing a strong biosafety protocol, which will be in place before we restart flights in June, including a much-simplified onboard offering. Recognizing the impact this crisis is having on our most loyal customers, we have extended ConnectMiles status through February of 2022, and we have waived all change penalties and provided flexibility to our customers by extending the expiration on travel credits until December 31, 2021.

As you can see, we have proactively taken the necessary measures to manage this crisis in the best possible way, and we'll continue to do so in the months to come. Lastly, we have a very solid 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, best 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, especially if fewer intra-Latin America markets are able to sustain direct, point-to-point service. We believe our hub will be the best position to serve this market.

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 being with us today. I'd like to join Pedro in acknowledging our great Copa team, who through this unprecedented crisis, the worst in the history of the aviation industry, have truly shown their great spirit. You make us proud.

I will start by briefly going over our first quarter results. Our capacity came in 14% below Q1 2019, mainly as a result of the suspension of our operations on March 22 because of the COVID-19 pandemic. Our load factor came in 1.9 percentage points lower at 81.5%, which, combined with a 6% increase in yields, resulted in a unit revenue improvement of 3.5% to $0.108. Excluding fuel, our unit cost came in at $0.066, which is higher year-over-year, mostly due to the suspension of operations during the latter part of March. Our operating margin came in 0.2 percentage points lower than Q1 2019 at 16.6%, and reported net income for the quarter came in at $74.3 million, which translates to earnings per share of $1.75.

Looking forward to the remainder of the year, as Pedro mentioned, since March 22, our operations have been suspended by the government of Panama due to the COVID-19 pandemic. As of now, the government has established a date of May 22 for the reopening of the country to commercial passenger operations, and we have published a return-to-service effective June 1. This schedule represents about 12% of 2019 capacity for the month of June and builds up to 40% by year-end 2020. As a worst-case scenario, if we are to assume a 0 revenue environment, we estimate that our cash burn will be around $85 million per month. This figure assumes reimbursement in cash of around half of our ticket sales liability and that our leased aircraft and debt commitments are paid in full. It also assumes certain reductions in our labor and other fixed expenses for the year. However, assuming a successful gradual restart of operations, we should be able to reduce our average monthly cash outflow to around $70 million for the remainder of 2020.

Now I'm going to spend some time discussing our balance sheet and our liquidity. We ended the first quarter with a very strong financial position. Assets totaled $4.4 billion. Owners' equity was almost $2 billion. Our debt plus our lease liabilities totaled $1.5 billion. Our lease liability adjusted net debt-to-EBITDA ratio came in at 0.5x, and our debt-to-equity ratio ended the quarter at less than 0.8x. Both measures are among the strongest in the industry. We closed the quarter with approximately $1.2 billion in debt, more than 60% of which is fixed with a blended rate including fixed and floating rate debt of approximately 2.8%. This debt balance includes $145 million in revolving short-term credit lines, which we drew on during the month of March. As part of our liquidity sources, we have also available to us another $150 million in committed, unsecured short-term lines of credit, which we have not drawn. As to cash, short- and long-term investments, we closed the quarter with $1.13 billion. There's another source of liquidity I'd like to highlight that we also have: unencumbered assets with book values reaching $600 million. This includes 19 unencumbered aircraft, 9 spare engines and our entire aircraft spare parts inventory, among others.

I want to turn now to the $350 million convertible note issuance, which we successfully completed last week. The notes have a tenor of 5 years, a coupon of 4.5% and a convert strike price of $51.66 per share. In the current environment where no one is sure about the duration of the effects of the COVID-19 crisis, we strongly believe that maximizing liquidity is one of the keys to our future. These convertible notes are part of our liquidity strategy, which is also composed of the $295 million in lines of credit, the launch of a secured revolving credit facility that would leverage the set of unencumbered assets that I discussed before, and the potential sale of several of our aircraft.

Finally, as we announced last week during our Q1 earnings prerelease, due to the current environment, our Board of Directors decided to postpone the payment of the remainder of the 2020 dividend declared by the company. That is $0.80 per share for each of the 3 remaining quarters of 2020.

So to summarize, we delivered good financial results for the first quarter of 2020, despite the fact that our operations were disrupted and eventually suspended during the latter part of March given the COVID-19 pandemic. We ended the quarter with a strong financial position having $1.13 billion in cash and equivalents. During the month of April, we obtained additional sources of liquidity, including $350 million in proceeds from our convertible notes offering as well as $150 million in additional undrawn committed lines of credit. We are working to lower our fixed costs, and even under an assumption of 0 revenues, we expect to burn around $85 million per month. And once we restart, which we expect will happen in June, this average cash burn figure could be in the range of $70 million per month for the rest of the year.

Let me close by stating that once this terrible situation passes, we believe Copa's Hub of the Americas will once again be the best connecting point for travel in the region with a privileged location, an even more efficient business model and the best team in the industry. We are working harder than ever with these goals in mind.

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

(Operator Instructions) Your first question comes from Savi Syth with Raymond James.

Jose, if I might clarify, you mentioned kind of additional financing sources. What are the ones that you haven't tapped yet here that you're planning? And I know you mentioned kind of the potential sale of a couple of aircraft. I'm just wondering what's the -- and even just what you haven't -- kind of on the pipeline, just what's the attractiveness of capital raising opportunities out there? What are the loan-to-values looking like these days?

Yes. Savi, we are working right now on a -- I think the next step is working on a revolving credit facility. That is in the final stages of being documented. It will be based initially with a subset of the unencumbered assets that we have. And as of now, I'd say that it's -- the 60% loan-to-value range is, I think, a fair figure that we're seeing with that. And I think that could potentially yield up to $200 million to $300 million in additional potential sources of liquidity. The facility is going to be relatively flexible in its form. And it will initially probably start at a lower level, but it's going to be -- it has an accordion feature to it that we can grow and shrink depending on our needs.

That's helpful. And if I might, have you had discussions with Boeing? I know some of the other Boeing partners have kind of received some payments and redone their fleet order book. Where are you in that process?

Well, we are right now in negotiations with Boeing. We're in that process right now. So I'd tell you that's what we will say so far related to this.

Your next question comes from the line of Duane Pfennigwerth with Evercore ISI.

Just on your capacity plan, 12% of last year in June growing to 40% of last year by year-end. Obviously, nobody knows. Your guess is going to be far better than mine, but how wide is the range of outcomes by 4Q? In other words, if you decide down 60% is way too low, how much flexibility do you have?

Yes. Duane, this is Pedro. Hope you're doing well. It's hard to tell. As you well said, no one really knows. We know that forward bookings are very weak right now. And this is industry bookings, not only Copa. We're monitoring the whole industry, and there's not much out there. So our June at 12% capacity, I think it's in line with what we're seeing. For the end of the year, for December, it's really, really hard to tell, but we'll retain enough flexibility to go up and down -- or down depending on demand, how demand builds up again. So that's a big part of our plan, retaining flexibility in terms of planes and crews.

And then just a longer-term question about capacity and CASM. You guys have been one of the most flexible in terms of being able to preserve a really nice CASM profile despite the fact that -- whether your capacity assumptions change materially. So as you think about 2021, what's the baseline where you feel like you could get back to, say, a 2019 CASM ex? Could you be down 20%, 30%, 40% and still have a hope of preserving a 2019 CASM ex? Just how do you think about that into next year?

Duane, I think that it's too premature to determine what the CASM figure for next year is going to be because of -- we -- I think our focus right now is reducing our cost base as much as we can, both our fixed costs and, eventually when we start flying again, our variable cost. So a CASM ex target right now is not our area of focus. It's just simply pure cost and reducing the total amount of costs that we have.

Fair. I guess just the potential. Could you manage to a business that's, call it, 30% smaller 2021 versus 2019? It just feels like you'd have a much better shot at managing your cost to that level of capacity than, say, the average airline?

Well, I think that we already started with a low base, and we're pulling all the levers that we need to pull to continue having a low unit cost, but there will be some pressures because of the lower level of ASMs. But certainly, I think if anybody has that ability to produce our ASMs at a low cost, it's going to be us.

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

Pedro, you talked about simplification a lot. You also mentioned a simpler onboard offering-. I'm wondering how LOPA or any just broad interior configuration may factor into that discussion. And maybe it's also a question about these lie-flat seats, but it's overall just an aircraft configuration question.

Yes. Thanks, Hunter. So we're not planning to make any aircraft configuration changes. We don't think it's worth investing. That will not be an essential investment for the company. So we're leaving configuration untouched. It's going to have more to do with product offering with a simplified -- we've always been a full-service airline. We deliver full service at low cost, lower than most other airlines. But going forward, we're going to even simplify -- further simplify our onboard product to reduce that interaction between crews and passengers. But also, we'll take advantage of opportunities that will make us even more cost-effective. And then also simplification comes from a single configuration of 737-800 and MAX 9.

I'm sorry. I meant longer term. That's my mistake. I realize that's not a near-term question, but I think when this thing is all done, as you think about this over the next few years is what I was asking. Sorry.

Right. So we're going to have 737-800s with a simple, unified configuration for, let's say, medium to short hauls. And then we'll have a MAX 9 configuration with a lie-flat seat for longer-haul flights. I would think that would be a good guess of what -- how we're going to look like in a few years.

That's great. And then sort of to piggyback a little bit on Duane's second question was, as you think about the opportunity for Copa, let's just we're back to 2019 capacity levels in 2023, 2024, whatever it may be, do you think we should expect margins to be in that sort of high-teens, 18% to 20% range as well? Or are you making any other changes that you think maybe should make that move higher or lower when things are sort of back to normal?

Hunter, it's hard to tell. There's like no way we can get right now how things are going to look back in 2022 or '23 or '24 from a demand point of view. But what I can tell you is that we will take advantage of this really difficult crisis to make the airline even better and more competitive, make it leaner, make it more cost-effective. That's kind of how we do things. So we'll be in a better position than most everyone to take advantage of whatever is offered to us or to survive whatever is in front of us. But part of that mix depends on demand, and that's really hard to predict right now.

Your next question comes from Joseph DeNardi with Stifel.

Jose, can you just talk about the liquidity that you guys have now? Is that being raised because that's what you think you'll need to kind of get through this? Or that's what you want to have to be able to go on offense at some point?

Well, Joe, this is, I think, as a function of the uncertain environment where we're in. And we're just building -- I think we're starting this crisis with a position of strength in terms of the balance sheet. But given the uncertainty, we don't know how long this will last and frankly, what other curve balls might be coming in the world over the next several months. We want to build just simply a fortress to be able to sustain the situation and be able to come out on the other side strengthened. So it's -- I don't think -- I wouldn't say that it's necessarily to give us the ability to play offense. We've always run our business in a way that is conservative from the standpoint of the balance sheet and with profitability in mind. So I think -- that's, I think, something that even under a very difficult operating environment, this is still kind of our driving force.

Okay. That's helpful. And then Pedro, sorry if you mentioned this in your prepared remarks. I was a little late getting on. But when you all start flying again, what does the passenger experience look like in the airport, onboard? And then what do those changes maybe in terms of -- I don't know, floor utilization? Like what does that mean for the cost structure? I imagine that some of that may evolve over time, but to the extent that it doesn't, does that mean anything for the financials of the business?

Yes. In terms of what it means to the financials, we will stay within the range we've always been at. So we're not expecting to, let's say, spend more money or have higher unit cost. At least that's our plan right now. But we're still waiting for world standards, which are not very clear right now. We have been flying some special flights, not many, but a few special flights a week to get stranded passengers back home, and we've been applying some of the safety protocols or biosafety protocols that will become standards in the future. For example, we are requiring all passengers and all crews to wear masks. We're also checking passengers before they board. We are -- the way we board and the way we check in passengers. All of those procedures have changed in our special flights. And we expect most of that to remain once we start to schedule operations, hopefully, in June. But then the product will be simplified also, as I mentioned before, to reduce the interaction between crews and passengers. And there will be some cost savings there, which should offset the additional cost from biosafety. But still hard to know exactly what all of that is going to look like.

Your next question comes from the line of Conor Cunningham with Cowen.

Just to piggyback on Duane's first question, I know there's obviously a wide range of expectations on 4Q, but how quickly can you actually add capacity back? Like is it a matter of weeks or months? Like I mean I know that 4Q is still kind of a ways out. But just curious like if you saw something a month out, could you add back capacity at that point?

Yes. It obviously depends on how much capacity we need to add. So we'll have extra lift, extra aircraft available to us for immediate flying. So if it's 1 or 2 additional aircraft worth of flying, that will be very easy. We will also have some aircraft in temporary storage, and getting those out of storage will take maybe a few weeks. So it depends on how many aircraft we need to bring back. But we will have enough flexibility to add or reduce capacity because this could go either way. We don't really know.

Okay. And then maybe -- I mean I realize that the liquidity position looks pretty good and you guys are adding more, and that's good to hear. But curious on when -- what demand level you would need to see for you to get to cash flow breakeven. And I realize that's a hard question to answer, but just curious on like with your current expectations on capacity, what time line or what quarter do you think you can achieve free cash flow -- sorry, cash flow breakeven?

Okay. So I'll start with that answer. Well -- and Jose can back me up. So there may be many moving parts here, and it's hard to put a time -- a specific time to this. But I know you're also asking what kind of demand. So our cash burn numbers imply really severe RASM reductions. So we're hitting RASM very hard in our predictions. Anything that gets us anywhere between probably 0% to 20% RASM reductions probably gets us very close to cash neutral numbers.

I think that's a key figure. If you're like in the teens in terms of RASM dilution, you're basically at cash breakeven. Now the question is when does that happen and under what circumstance? That's, I think, left to be determined given how demand flows back over the next several months.

And of course, I'll add to that. With time, time being years, we will be able to adjust the airline size and cost base to whatever future demand is. But that will take a few years.

Yes. That's assuming that we're carrying our entire basically fixed -- not the entire fixed cost base but entire aircraft base, right, in terms of debt and these airplanes, et cetera. So with time, you'll be able to adjust that as well, but that's kind of where that lies.

Okay. And maybe just one quick one. I mean I know that you're not running the operation right now. So there's probably not a ton of searching going on in your website. But have you seen any upticks in searches in the last couple of weeks just given there's been talk of reopening and all that stuff kind of globally? So just curious if you've seen anything there.

Yes, not much, nothing significant. And that's not only in our website, but that's industry-wide numbers that we're monitoring in Latin America, of course, in our region.

Your next question comes from the line of Josh Milberg with Morgan Stanley.

My first one is a follow-up on the capacity ramp-up and just on how you see the ASM being distributed geographically as you put them back, just also taking into account some of the big currency moves in the region. And I'm sure that those currency moves are part of what's behind your expectations for a big RASM hit.

Yes, Josh. Of course, the economic impact situation in our region, including the currency devaluations, are part of the mix, and it's all related, of course. So our capacity -- the way we're going to ramp up capacity from here to year-end, it kind of mirrors our network before the crisis. So the percentages per region or per market are going to be very similar. However, we have flexibility to move capacity around. And we serve markets that go all the way from VFR, visiting friends and relatives, business and leisure. We have a good balance in terms of the markets we serve. And we'll closely monitor how demand comes back in each of those segments and adjust capacity accordingly.

Okay. That's very helpful. And can you guys also talk a little bit about the opportunity to take share coming out of the crisis? You mentioned some of the uncertainties there. But just given your competitors' difficulties, I mean it seems like there would be a major opportunity. And a related question, if you could just address the degree of overlap you had with your largest rival in Colombia just before COVID hit. At least for us, there's always been a little bit of murkiness on the degree of overlap that you've had with that competitor and your other major competitors just because I think you compete in so many markets and because you've had this past focus on smaller markets that need a hub.

Right. So we do think that our much broader network and larger intra-America hub and intra-Latin America hub will put us in a good strategic position, assuming many markets will have to shrink in size and won't be able to sustain direct point-to-point service. So Panama being in the best geographic position and being the better and most efficient connecting hub should take -- should be in an advantageous position with those smaller markets. We always -- as you know, we run the company first and foremost for our shareholders, and we do what's right for the company to be successful and profitable. We don't focus as much in our competitors, at least not in a way that sacrifices our own performance. And we will take advantage of opportunities as part of our -- just the way we run the business. So if we're in the best position to take advantage of markets that will be abandoned or no longer sustain point-to-point service or if we're going to be in a position to be able to come back at a faster pace, we'll do it because it's good for the business. That will be the main reason, and it's the way it's been in the past and it has worked very well for us.

That's great. I suppose there really isn't an easy way to quantify what that opportunity would be in terms of just the magnitude.

Yes. Hard to tell right now. And you asked also how much we overlap with our main competitors. So the Panama hub and the Bogotá hub are the ones that overlap the most. And I would say that it's less than half of the markets where there's an overlap, probably more like 1/3 of the market where there's an overlap.

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

Just a few questions here. So look, I see you loaded your June schedule, I think, in the last week or so. And when I look at even some of your biggest city pairs, you're going to be flying less than daily, a lot of 2-day a week type stuff for the time being, and then it slowly starts to ramp up. And when I think about kind of the success of Copa, it's all about connectivity. And so it does seem like that, at least initially, your service is going to cater to the local market. It seems like it's going to be actually very difficult to construct connection -- connecting itineraries. And my sense is that as you look out, as you go from this 12% to 40%, it seems like there will be a point where city pairs that are 2 or 4x week will go to daily and will get to a step function where 500 or 700 itineraries, O&D itineraries, will turn on and you'll get a jump in load. So presumably, your loads will start at a low level not just because of the weakness that we're seeing across the region, but because historically, you rely so much on connecting traffic. And so just your thoughts on that. Maybe initially, is it 90% local, 10% connect? And maybe you can give us a sense of the year. At what month do you think you actually get to maybe the 50-50 point local versus connect? Because I think you're going to see that in your loads and there will be a big jump because I think my sense is that it will be a step function increase. Just comments on that. Or maybe my thesis is completely wrong here. So...

All right, Mike. So your -- there's a portion of it where you are correct, which is the fact that we're starting June with an itinerary that is less than daily in many markets, but we have actually crafted our itinerary precisely so that it connects. And we've actually taken care from the standpoint of the overall frequencies in some of these cities even at -- understanding that aircraft utilization might not be the most efficient just simply so that the markets connect. And so yes, we are catering from the start that the hub is a connecting hub, and we'll continue building upon that. And as time passes throughout the year, yes, there will be more connecting on these included because of both the number of frequencies and number of cities that we're adding. But from the start, you will have quite a bit of connectivity in the cities that we are starting with initially. Basically -- yes. So it does have quite a bit of connectivity in there. It's just simply that it's set at less than daily frequency.

Yes. And Mike, the only thing I'll add to that is that our planning team was very clever in putting the schedule together and preserving our connectivity, full connectivity pretty much even when not all markets are daily.

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Yes. No, no. I mean I'm looking at the schedule, and it will be remarkable to see where you actually do the connectivity, especially a lot of these flights that are twice a week. I guess there's going to be some busy days. Maybe every Friday and Sunday will be your busy days.

Yes, yes. And there's some of that, and there's something there in terms of how we're rotating aircraft, et cetera. So that's -- they were very clever in the way that they built it.

Okay. Great. And then just another question. As I think about -- you talked about the compensation on the MAX with Boeing. Obviously, you're still working through that. As the last -- I think the last time I checked, I recall you having something -- and I could be wrong on this number, but I recall you having something north of $450 million in predelivery deposits with Boeing. And so the question is, the fact that you're not taking airplanes and that you have this conversation ongoing, can we look to -- one is that $450 million, is that in the right ballpark? And can we look to that as a potential source of financing as you work through the compensation agreement?

Yes. Mike, the...

And I'll just say liquidity, not financing but liquidity.

No, I understand. No, I understand your question. Yes. The figure is in that ballpark in terms of the predelivery deposits that we have there at Boeing. The reality is that we're in discussions with Boeing right now, and I will leave it at that for now.

That's fine. That's fine. I just wanted to get confirmation of that number. Just my last question. So it did -- and this is probably again to you. When we look at your air traffic liability, it did come down a lot from December to March, which I know seasonally, there are some changes here and there, but it was bigger. And I suspect that because you did shut down with, I don't know, 7, 8 days to go at quarter end, you must have gotten a flood of cancellations. You indicated in -- earlier that your guidance assumed that 50% of your cancellations were basically refunded in cash. So presumably, a lot of cash went out the door. As we look at that $412 million, that ATL, and we look at the June quarter, how much of that $412 million actually covers? Would you have a sense of how much of that actually covers the June Q since we've seen a lot of cancellations between now and then? Any color that you can give on that.

Yes. I think, Mike, the majority of -- there's a couple of components to the reduction in the ATL. One is, as you well mentioned, there's some seasonality in there but mostly is the fact that a lot of that ATL that we had in December basically flew in the first quarter and then sales basically stopped coming in for the latter part of the first quarter. So more than necessarily, a significant amount of cash going out because of reimbursements. It was mostly because of sales not coming in during the latter part of the quarter. Yes. So that's more of the explanation. There is -- we have an estimate that for the remainder of 2020, upwards of around half of that ATL balance will go out in reimbursement. One thing I have to be very clear as well is that we've been very much forward in our opening of our flexibilization of tickets and credits for passengers and allowing them to use their tickets for future travel. So we've been very flexible on that, and that has minimized the cash-out. I -- so far, we have not seen a significant amount of request for reimbursements, but of course, that might change going forward. There is a portion of that ATL that is related to flying in the second quarter. And in April and May, we have not flown. So there might be some additional pressure versus what we have observed right now, and that's what is in our figures, in the figures that we have put out -- the cash flow figures that we have put out for the remaining part of the year.

So should we look at that 50% as then being conservative because of what you just said about reimbursement?

From what I'm observing right now, yes. But we don't know what the -- how that accelerates going forward and what are changes in behavior we might see. But so far, it is conservative in nature from what I'm seeing.

Yes. That makes sense. And I would say that whatever schedule you've put out for June, that is obviously subject to being changed again, and it's possible that you could scale that back from 12% to 8% based on companies opening up or not over the next month. So that's...

Yes. Correct. That's exactly why we're trying to be fairly conservative with that assumption.

Your next question comes from the line of Rogério Araújo from UBS.

I have a couple of questions here. First, as a follow-up on Josh's question -- and I would like to explore a little bit more about Colombia. So is this scenario possible? So if there is, for instance, a fast recovery of the domestic market versus international flights and if there is a capacity hole on that market, can we imagine Copa exploring more that market and the mix of domestic flights versus international flights increasing significantly in upcoming months? So in other words, are you going to explore any market that is possible that may recover faster? So can we even expect maybe much less connectivity as a percentage of total flights for Copa in several months' time if those domestic flights recover faster? That's my first question.

This is Pedro here, Rogério. I would say that a faster recovery does not mean that the market is going to be more profitable. So we usually look at both things. But I would say, no, there will be no significant change in the next few months or for -- from here to year-end even though, of course, we have our Colombian operation and we have Wingo in Colombia, which is a successful ULCC. But nothing is going to change overnight. So I would not expect significant changes from here to year-end.

Okay. What about in the long term? Can this be a possible scenario in which domestic flights increase significantly inside Copa if there is for -- of course, an opportunity there?

I mean I don't want to speculate long term, but we've -- always have the flexibility to take advantage of opportunities that might present along the way, but I don't want to speculate because we don't really know right now.

Okay. Good. And my second question is regarding the convertible senior notes. So the stock sold off after this was announced. We received a lot of questions on that matter. So it would be great if you could provide more details on the process for which this notes release was decided within the management team. So why the company decided to issue that now and at the beginning of the crisis? And also if a follow-on offer was also taken into consideration and why the first one was the chosen option. And also, if there is -- if there was a lot of demand for that notes with a strike price at $51.66. If you can say how many times oversubscribed, if that was the case. And lastly, in the case the notes are redeemed before the conversion period, which is as of October 24, so will the company have to pay the equity upside from the potential conversion to the noteholders? In other words, does that make-whole premium include the equity upside as well?

Yes. I don't know how much we can answer or want to answer right now, and we're going to try not to be a Monday morning quarterback. But we're doing what makes sense for Copa to come out of this crisis as one of the better prepared, most successful and poised to prosper in the future airlines. So we're doing what we think we need to do right now to have a solid and successful future as we've always had. And this is a crisis like we've never seen before.

So I would say a few things. One, that many of our Board members are significant shareholders in the company. So this is not a decision that was taken lightly. Also, there's enough uncertainty regarding future demand and the timing and shape of recovery for us to be very conservative and make sure we have a fortress liquidity position, which is what we're building. And we're building for the long run, not for the short term. And there's also a limit in what's going to be available going forward for an airline, being aviation one of the hardest-hit markets. So we take everything into account, and we conclude that building the cash fortress I mentioned and via this note is the best decision to, as I mentioned before, make sure that Copa comes out of this crisis in a strong position. We enter in a strong position, we're going to -- we want to come out in a strong position, and we want to be able to be an airline that continues succeeding in the future.

Yes. That's very clear. So only a follow-up here. A question I've been receiving. Is there any related parties in that transaction?

No.

Your next question comes from the line of Pablo Monsivais with Barclays.

I have a couple of questions. The first one is I would like to have more color on your fleet plan. You mentioned you want to simplify further your fleet. Any sense of timing, priorities, how easy right now is to drop the E90s and the 700s?

Also, another question on government restrictions. What are you assuming on that front incorporating in your capacity recovery plan?

And my last question is on ticket reimbursement. I think that you already kind of touched on that, but what have you seen in the last 6 weeks? And what can we expect for modeling purposes to that number look like?

Okay. Yes. Pablo, first, in terms of the fleet plan, yes, we discussed we're assuming that the 14 190s are disposed of. We already announced that last year, and that was already in the plan. What we are announcing today is that we are also considering retiring the 737-700 fleet. That's 14 aircraft. And there could be other fleet moves that we have going forward just simply to match where we have demand at a particular moment. So we will ultimately remain with a reduced fleet of 737-800s and MAX 9 aircraft in the company's fleet. There's a lot of moving parts. I think that there's several alternatives that are out there related to both the E-190 and the 700. And we are actively looking at that with -- we're having money simply to adapt our fleet to reality and make the best decision for the company. And again, we want to keep the flexibility so that we have the fleet that we need to operate, but it will be essentially 800s and MAX 9s at this stage.

In terms of government, we're tracking closely day by day what each government has in terms of restrictions. As of now, with the date that we have for commencing our operations in June, the published scale that we have has included -- we're flying to places where, so far, there are no significant restrictions for us to restart operations, but that could change. Governments over the last week have been very active in just adapting their dates and the restrictions. But so far, what we have published, has the ability to be flown during that moment. But again, it could change. It could change here or it could change in other -- the neighboring countries that we have.

And what we have observed in terms of ticket reimbursements is a lower figure than that average that -- we kind of -- we spread out the assumption that we put out, which is close to 50%. And you assume a linear reduction of that 50% of the ATL. What we have seen in the months of March and April is lower than that figure that we have assumed. But we are also expecting that this could accelerate depending on what passenger behavior is, et cetera. So we -- that's the reason we have somewhat of a higher figure in our forward assumptions. But so far, the observed figure has been lower than what we have been including in our models.

Your next question comes from the line of Gabriel Rezende from Bradesco BBI.

Two questions on my side. First, you mentioned the expansion of all nonessential CapEx considering the current situation. I was just wondering if you could provide some detail on how much you're expecting in terms of our essential CapEx for 2020 and whether it is included in the $85 million monthly cash burn you mentioned.

And the second question, are you considering any possibility of an aid plan from Panama government? Do you have any ongoing discussion on that?

Yes. I'll answer the first one, Gabriel. The nonessential CapEx that we have assumed basically is related to aircraft maintenance, kind of required CapEx from a regulatory perspective. And it's in the mid-single digits per month on average, and it is included in the $85 million figure that we put out. So that is included. And Pedro will answer...

Yes. In terms of -- we're not requesting nor are we expecting any aid from the government. I think the government has bigger issues to deal with. And as we mentioned before, we came in, in a stronger position than others, and we're taking the necessary measures, some very difficult, of course, to be able to survive this crisis and prosper in the future using our own means.

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

Just a follow-up question on the negotiations with Boeing. So have there been any kind of discussions on a potential revision to the order book with Boeing? And what should be the new pace of deliveries after COVID-19?

It's all on the table, but there's not anything specific that I can share right now. We're still talking to them.

Okay. And in terms of capacity going beyond the year-end 2020 and the 40% recovery you are expecting. So what should be our expectations in terms of going back to the profit levels? I mean are you expecting a recovery of 3 years, 4 years, 5 years or maybe longer term?

Yes. I don't think we know more than anyone else. And the experts talk mostly about 2 to 5 years and probably most are in the range of 3 to 4 years, in that range. We don't really know anything that they don't know, and no one really knows much. So it's hard to tell, but we're going to -- we're putting all of our efforts in, one, taking action in a proactive way; and secondly, in making sure we prepare the company for whatever size we need to be in the future and whatever demand is out there available for us. So we want to be successful even if we -- if the industry is not at pre-crisis levels for a long time.

And your final question comes from the line of Stephen Trent with Citi.

Just 2 very quick follow-ups from me, I mean kind of actually 1. When you think about the long-term strategic landscape and the potential that the stronger carriers in the region benefit from some potential demand spillover, kind of a follow-up to Josh Milberg's question, is anything at this juncture leading you to think differently about, one, your potential joint business agreement with United Airlines, with one of the partners there, assuming -- not either of you, but one of your partners seems to be in some difficulties? And two, at this early stage once again, any way that you are thinking longer term that on the redeployment of Wingo, perhaps more aggressively or even less aggressively? Just kind of wanted to get your thoughts there.

Okay. It's -- well, I would say, first, that we feel our Hub of the Americas in Panama, it's going to be an even more valuable strategic asset in the future. Because if the industry has to shrink or if that happens -- and that will probably happen for a while, I mean that's pretty certain, there will be a number of markets that will need a hub more than before. And we're the better hub in terms of geographic position and ease of connectivity, et cetera. So Panama will be even more relevant than before, and we should be in a position to take advantage of that from -- again, from the standpoint of the strategic position but also being a stronger carrier from a balance sheet standpoint. So we should be in a good position there. And we'll be flexible, as mentioned before. Wingo in Colombia will be flexible, and Copa in Panama and through all the Americas will move up and down depending on the opportunities. We don't want to just get ahead of ourselves, and we don't want to do things because someone else is weaker. We want to make sure we are strong and that we take advantage of all the opportunities that belong to us, everything that makes sense for Copa to remain as a profitable airline going forward no matter the size that we'll be.

I am showing no further questions at this time. I would now like to hand the conference back over to Pedro.

Okay. Thank you all. This concludes our earnings call. Thank you for being with us. Thank you for your continued support. Please stay safe and healthy, and be sure that we're taking all the actions -- all the necessary actions to make sure that Copa comes out of this crisis in good shape and ready to continue to prosper in the future even though we know the rough times ahead for the aviation industry. But we hope to be one of the airlines that does better relatively speaking and again, that is in a good position for what's ahead in the long run. So thank you again, stay safe, stay healthy, and see you in the next call.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.