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Edited Transcript of CPA earnings conference call or presentation 13-Feb-20 4:00pm GMT

·46 min read

Q4 2019 Copa Holdings SA Earnings Call Panama Feb 22, 2020 (Thomson StreetEvents) -- Edited Transcript of Copa Holdings SA earnings conference call or presentation Thursday, February 13, 2020 at 4:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Jose Montero Copa Holdings, S.A. - CFO * Pedro Heilbron Copa Holdings, S.A. - CEO & Director * Raul Pascual Copa Holdings, S.A. - Director of IR ================================================================================ Conference Call Participants ================================================================================ * Alejandro Zamacona Urquiza Crédit Suisse AG, Research Division - Research Analyst * Bruno Amorim Goldman Sachs Group Inc., Research Division - Equity Analyst * Daniel J. McKenzie The Buckingham Research Group Incorporated - Research Analyst * Duane Thomas Pfennigwerth Evercore ISI Institutional Equities, Research Division - Senior MD * Helane R. Becker Cowen and Company, LLC, Research Division - MD & Senior Research Analyst * Hunter Kent Keay Wolfe Research, LLC - MD and Senior Analyst of Passenger Airlines, Aerospace & Defense * Michael John Linenberg Deutsche Bank AG, Research Division - MD and Senior Company Research Analyst * Rogério Araújo UBS Investment Bank, Research Division - Director and Equity Research Analyst * Savanthi Nipunika Syth Raymond James & Associates, Inc., Research Division - Airlines Analyst * Stephen Trent Citigroup Inc, Research Division - Director ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for standing by. Welcome to the Copa Holdings Fourth Quarter and Full Year Earnings Call. (Operator Instructions) As a reminder, this call is being webcast and recorded on February 13, 2020. Now, I will turn the conference call over to Raúl Pascual, Director of Investor Relations. Sir, you may begin. -------------------------------------------------------------------------------- Raul Pascual, Copa Holdings, S.A. - Director of IR [2] -------------------------------------------------------------------------------- Thank you very much, Chris, 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 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 the earnings release, which has been posted in the company's website, copa.com. In addition, our discussion will contain forward-looking statements, not limited to historical facts, that reflect the company's current beliefs, expectations and/or intentions regarding future events and results. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially and are based on assumptions that are subject to change. Many of these risks and uncertainties are discussed in our annual report filed with the SEC. Now, I'd like to turn the call over to our CEO, Mr. Pedro Heilbron. -------------------------------------------------------------------------------- Pedro Heilbron, Copa Holdings, S.A. - CEO & Director [3] -------------------------------------------------------------------------------- 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 keeps us at the forefront of Latin American aviation. Today, we're proud to report strong fourth quarter and full year results, despite the missed revenue opportunities as well as the operational and financial drag created by the prolonged MAX grounding. We're also pleased to report we're seeing good booking trends and despite potential headwinds, are encouraged by the prospects for 2020. Among the main highlights for the quarter. Passenger traffic decreased only 1.7% year-over-year on a capacity decline of 4.6%. This resulted in an 85.3% load factor, 2.5 percentage points higher year-over-year. Yields came in at $0.125 and or 6% higher than in the fourth quarter of 2018. Unit revenues or RASM increased 8.9% year-over-year to $0.111. On the cost side, our CASM, excluding the noncash fleet impairment charge, came in at $0.093. Excluding fuel, our adjusted unit cost came in at $0.066 or 6.4% higher year-over-year, due mainly to the reduced capacity and cost inefficiencies associated with the MAX fleet grounding as well as increased expenses related to the stronger revenue performance. Operating margin, excluding special items, came in at 15.7%. On the operational front, Copa earnings delivered an on-time performance of 91.9% and a completion factor of 99.8%. Again, industry-leading results. Now turning to our main highlights for the full year 2019. Unit revenues increased 3.9% year-over-year to $0.108, driven by a 2% increase in yields and a 1.4 percentage point increase in load factor. We achieved our goal of incremental $20 million in ancillary revenues driven by the expansion of our baggage policy to the entire network and continued growth of ConnectMiles. Adjusted CASM ex-fuel came in at $0.063 which was mainly affected by the prolonged MAX grounding, but still among the lowest for a full-service airline. Our operation -- operating margin, excluding special items, came in at a solid 16.1% for the year. We started flights to Paramaribo, Suriname, growing to 80 destinations in 33 countries in North, Central, South America and the Caribbean and strengthening our position as the most complete and convenient hub in Latin America. We continued the in-house development of our IT tools, including our app and Web Check-in tools, which received excellent reviews from our passengers. And on the operational front, we delivered an on-time performance of 92% and were recently recognized by FlightStats for the seventh consecutive year as the most on-time airline in Latin America and by OAG as the second most on-time airline in the world. I'd like to take this opportunity to recognize our more than 9,000 employees for everything they do to deliver a world-class travel experience for our customers. Turning now to our expectations for 2020. Only 2 months ago, during our Investor Day in Panama, we discussed our 2020 plans under a very different set of assumptions. The MAX was projected to be flying again in Q1 of 2020, and we were expecting to receive 14 MAX aircraft during the year. Under that scenario, we were planning for 5% capacity expansion and an accelerated replacement of our Embraer fleet. It now looks like the MAX won't fly until the second half of 2020, and Boeing won't be able to deliver the number of MAX aircraft we were expecting this year. That being the case, we have reduced our capacity growth for 2020 and will have to slow down the Embraer transition with most of the aircraft now leaving in 2021. On a more positive note, fuel prices are lower than in 2019. So if this continues, it should certainly help our results for the year. We're also seeing a good demand environment in the region with solid booking curves and positive yield in the first quarter. However, it's still early in the year. As always, Jose will provide a detailed update on our guidance and assumptions for the year. Turning now to our most important 2020 initiatives. We will progressively move into the new terminal at our hub at Tocumen Airport in Panama, which will positively impact our operating efficiency and passenger experience. We continue with the implementation of the Farelogix platform to enable merchandising and distribution capabilities across all channels and expect to roll out basic economy fares by the second half of the year. Wingo's fleet has been upgraded to 737-800s, and they will get a fifth aircraft based in Panama towards the end of the year. Finally, even though we have not settled on a compensation scheme with Boeing, I would like to reassure you that we're working together with them and expect to be fairly compensated. To summarize, we're seeing a good demand environment and expect good results for the first quarter of 2020. We are reducing our capacity assumptions for the year, given the prolonged MAX grounding. Our team continues to deliver world-leading operational results. We continue looking for efficiencies and savings with the goal of further reducing unit cost. We also continue focusing on revenue opportunities, including ancillary initiatives that are aimed at strengthening our results. Lastly, we're as confident as ever in our business model and our financial strength. We continue delivering a great product, leading unit costs and strong margins, making us the best positioned to consistently deliver industry-leading results. Now I'll turn it over to Jose, who will go over our financials in more detail. -------------------------------------------------------------------------------- Jose Montero, Copa Holdings, S.A. - CFO [4] -------------------------------------------------------------------------------- Thank you, Pedro. Good morning, everyone, and thanks for being with us today. Once again, I'd like to join Pedro in acknowledging our great Copa team for all their achievements during a challenging year. I will start by going over our full year highlights. Due to the MAX fleet grounding, we reduced our capacity by 2.7% year-over-year. Our load factor came in 1.4 percentage points higher at 85.3%, which combined with a 2% increase in yields resulted in a unit revenue improvement of 3.9% to $0.108. Excluding fuel and special items, our unit cost came in at $0.063, which is mainly higher year-over-year due to the capacity reductions and additional costs and inefficiencies associated with the MAX fleet grounding. Excluding special items, mainly the Embraer fleet impairment, our operating margin improved 3.1 percentage points to 16.1%. We continue delivering a world-class product and were once again recognized as the most on-time airline in Latin America and second most on-time airline in the world. Reported net income for full year 2019 came in at $247 million, which translates to earnings per share of $5.81. Excluding special items, mainly the noncash impairment charge of $89.3 million generated after we decided to sell the remainder of our Embraer-190 fleet. Adjusted net income came in at $336.3 million, which translates to an underlying net margin of 12.4%, or adjusted earnings per share of $7.92, 21.6% higher than the adjusted net income of $376.7 million or adjusted earnings per share of $6.52 in 2018. Now, turning to our fourth quarter results. Given the MAX grounding, we reduced our capacity by 4.6% year-over-year, while revenue passenger miles decreased only 1.7% year-over-year. This resulted in a consolidated load factor of 85.3%, a 2.5 percentage point increase versus Q4 2018. Yields were also stronger, coming in 6% above last year at $0.125 and resulting in unit revenues of $0.111, 8.9% higher year-over-year. Consolidated revenues increased 3.9% year-over-year to $681.9 million despite the 4.6% capacity contraction. On the expense side, excluding special items, our fourth quarter operating expenses decreased 3.2% year-over-year on the 4.6% capacity decrease, which resulted in our adjusted cost per available seat mile increasing 1.4% to $0.093. For the quarter, our effective oil and fuel price averaged $2.16 per gallon, a decrease of 9.2% versus the $2.38 per gallon that we averaged in Q4 2018. Adjusted unit costs, excluding fuel, came in 6.4% higher year-over-year from $0.062 in Q4 2018 to $0.066 in this quarter. This increase is mainly associated with the capacity decline year-over-year, driven mostly by the MAX grounding, which placed some pressure in several of our cost lines. Specifically, aircraft ownership, maintenance, salaries, wages and benefits and airport-related expenses. Adjusted operating earnings for the quarter came in 72% higher at $107.1 million, resulting in an adjusted operating margin of 15.7%, 6.2 percentage points higher than the 9.5% generated in Q4 2018. Excluding special items, the fourth quarter generated a net nonoperating expense of $9.4 million compared to a net nonoperating expense of $14 million reported in Q4 2018, mainly as a result of a foreign currency gain of $2.4 million realized in Q4 2019, compared to a $6.8 million loss in Q4 2018, offset by a $5.3 million interest expense charge in Q4 2019 related to a reduction in discount rates utilized for the calculation of the provision for future lease return conditions. In terms of net results, the quarter generated a net profit of $2.7 million or EPS of $0.06 compared to a loss per share of $3.67 in Q4 2018. Excluding special items, mainly the $89.3 million noncash impairment charge related to the E-190 fleet in Q4 2019 and the $188.6 million noncash impairment charge, and then $11.4 million foreign currency adjustment in Q4 2018, adjusted net income came in at $92.1 million. And adjusted net margin of 13.5% or $2.17 per share compared to $1.04 per share in Q4 2018. Turning to the balance sheet. We closed the quarter with a very strong financial position. Assets totaled $4.3 billion, owners' equity totaled $1.9 billion. Our debt plus our lease liabilities totaled $1.4 billion and our lease liability, adjusted net debt-to-EBITDA ratio came in at 0.5x, one of the strongest in the industry. Keep in mind that with the adoption of the leasing standard IFRS 16, throughout 2019, and we have adjusted the net debt by including the lease liability lines from our balance sheet. We closed the quarter with approximately $1.1 billion in debt, more than 60% of which is fixed with a blended rate, including fixed and floating rate debt, of approximately 3.1%. During the year, we reduced our debt balance by almost $300 million. In regards to cash, short- and long-term investments, we closed the quarter with close to $985 million, an increase of $124 million for the year. Our year-end cash balance represents approximately 36% of last 12 months' revenues. I'm also pleased to announce that our Board of Directors has approved a quarterly dividend of $0.80 per share for the year 2020, corresponding to our dividend policy of 40% of prior year's adjusted net income. The first quarterly dividend will be paid to mark -- on March 13 to all shareholders of record as of February 28. Finally, I wanted to share an update of one of our most important projects. During our Investor Day back in December, we laid out a plan to reach Sub-6 unit cost by 2021. You might remember, one of the components of that plan was replacing our Embraer-190 fleet with a higher gauge, lower unit cost MAX aircraft during 2020 and the early part of 2021. And we were working with an assumed reentry into service of the MAX during Q1 2020. As Pedro mentioned, since then, there has been a significant revision to the MAX return to service time line. And as of now, we have removed the MAX from our scale until the end of August. We continue working with our Sub-6 plan, but it is now clear some of these important fleet transition events will slip into the latter part of 2021. So to summarize, we delivered solid financial and operational results for the fourth quarter and for the full year despite facing significant drag in our cost structure due to the MAX fleet grounding. Our network continues being the most convenient for travel within the Americas with world-class operational indicators. We continue delivering our leading unit cost and are working on our Sub-6 Initiatives. We have one of the strongest balance sheets in the industry, and we continue to return value to our shareholders. Today, we're also providing guidance for 2020, based on our operating plan and expectations for air travel demand for the year. Given the latest MAX return to service assumptions, we now expect our capacity growth in terms of ASMs to be approximately 1%. And given the lower fuel curve for the year, we are increasing our operating margin range to 18% to 20%. Our 2020 full year guidance is based on the following assumptions: load factor of approximately 85%; RASM of approximately $0.109, CASM ex-fuel of approximately $0.063 and a lower effective fuel price per gallon, including $0.27 of into-plane expenses of approximately $1.95. Thank you. And with that, we'll open the call to some questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) And our first question comes from the line of Savi Syth with Raymond James. -------------------------------------------------------------------------------- Savanthi Nipunika Syth, Raymond James & Associates, Inc., Research Division - Airlines Analyst [2] -------------------------------------------------------------------------------- Just a little bit more. I'm hoping for color on the -- how you're thinking about the fleet? I know there's a lot of uncertainty here, but just what the current plan assumes related to kind of the how many MAXes that you'll have this year? I'm guessing you'll be able to unground. I wonder if you can provide how many kind of Boeing has built and has -- is storing. So I'm guessing those you can get back in the air relatively quickly. Just if you can provide a little bit more on what the current plan assumes? -------------------------------------------------------------------------------- Jose Montero, Copa Holdings, S.A. - CFO [3] -------------------------------------------------------------------------------- Savi, this is Jose here. So we have currently 6 MAXes that are parked here in Panama, as you know, already part of our fleet. And then we have -- there are 7 MAXes that have been built by Boeing that are pending to be delivered that are -- were built last year and that are stored. And so our plan for the year assumes that throughout the latter part of the year, we would get delivery of up to those 7 aircraft. And then we are assuming that the first Embraer will depart the fleet in September and it will be around 3 aircraft that will be parting in 2020. So for a net growth of around 4 planes for the year. -------------------------------------------------------------------------------- Savanthi Nipunika Syth, Raymond James & Associates, Inc., Research Division - Airlines Analyst [4] -------------------------------------------------------------------------------- That's helpful. And as I -- just curious, I know when we were at the Investor Day, the thinking was that maybe it takes about a month to once the MAX is recertified to kind of get back in the air, is -- now that there is kind of sim training requirement, and I know you have a sim. Just does that elongate how long it takes to kind of get back? Or any kind of revised thoughts on just kind of the gap between recertification and being able to return to service? -------------------------------------------------------------------------------- Pedro Heilbron, Copa Holdings, S.A. - CEO & Director [5] -------------------------------------------------------------------------------- Savi, this is Pedro here. So first, just to build on what Jose just said. Jose explained what we are expecting, but there's no certainty of what we're going to get from Boeing, yet, I don't think Boeing knows themselves. So we don't have any certainty in how many aircraft we're going to get. In terms of the time it will take us to put them back in the air, it should be less than a month maybe 2 to 3 weeks and the training should not be an issue because we continue training our pilots in the MAX simulator. So it should be very easy to get them back. I mean mind you that we do not know all the new requirements, but they are proficient in the MAX simulator and in the MAX aircraft. We have not stopped doing that. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- Our next question comes from the line of Duane Pfennigwerth with Evercore. -------------------------------------------------------------------------------- Duane Thomas Pfennigwerth, Evercore ISI Institutional Equities, Research Division - Senior MD [7] -------------------------------------------------------------------------------- Just on Wingo. Can you give us a sense -- and I apologize if you said it, but what's the headwind to Copa's sort of system profitability from Colombia? What do the margins look like relative to system margins? -------------------------------------------------------------------------------- Pedro Heilbron, Copa Holdings, S.A. - CEO & Director [8] -------------------------------------------------------------------------------- Well, we don't really share margins by market. But I can give you kind of directionally some indication of how Wingo is doing. Wingo had a positive 2019, it had quite a good year. They now have their 4 aircrafts are 737-800. We have upgauged their fleet from the 700s to the 800s. And we see Wingo as a positive force, although it's still only about 3% -- for this year it should be around 3% of our ASM. So it's not like it's going to be a big, very significant impact. -------------------------------------------------------------------------------- Jose Montero, Copa Holdings, S.A. - CFO [9] -------------------------------------------------------------------------------- Yes. But I think that the fact that we're growing it, and it's a very strategic -- a brand that we have and a product that we're rolling out, and it will grow by, I think, about 30% for the year, given the up-gauge. So it's -- it's a very important part of, I think, the overall Copa strategy. -------------------------------------------------------------------------------- Duane Thomas Pfennigwerth, Evercore ISI Institutional Equities, Research Division - Senior MD [10] -------------------------------------------------------------------------------- How would you characterize kind of Colombia domestic as a market? I mean, outside of the things that you're doing to self-help and profit improvement from a network perspective, et cetera? How would you characterize kind of Colombia domestic? Is it getting better? -------------------------------------------------------------------------------- Pedro Heilbron, Copa Holdings, S.A. - CEO & Director [11] -------------------------------------------------------------------------------- Colombia domestic is highly competitive, it's a highly competitive market. And Wingo, I would say, it's more Colombia international, Colombia, regional, international and leisure routes. And we do have domestic service, but we're not a big player in the domestic market. -------------------------------------------------------------------------------- Duane Thomas Pfennigwerth, Evercore ISI Institutional Equities, Research Division - Senior MD [12] -------------------------------------------------------------------------------- And then just lastly, with respect to basic economy, as I think about Copa and your very strong competitive position in the hub. Why does -- why is basic economy a priority for you and how much is this -- how much does that have to do with sort of product alignment with your partners versus a real need? -------------------------------------------------------------------------------- Pedro Heilbron, Copa Holdings, S.A. - CEO & Director [13] -------------------------------------------------------------------------------- Okay. It's an opportunity. Maybe more than a need, but we do compete against airlines from all over the place. We compete against legacy carriers, against low-cost carriers and some carriers that are kind of in the middle. And in many cases, we compete with very low fares, where we offer the whole Copa full-service product but charged fares are very competitive with [OCC]. So whomever we're competing against. So a basic economy is going to allow us to compete much better and extract more revenues from those passengers. So it's an opportunity that we've been giving up for lack of the proper systems, but that's going to change towards the middle of this year. -------------------------------------------------------------------------------- Operator [14] -------------------------------------------------------------------------------- And our next question comes from the line of Michael Linenberg with Deutsche Bank. -------------------------------------------------------------------------------- Michael John Linenberg, Deutsche Bank AG, Research Division - MD and Senior Company Research Analyst [15] -------------------------------------------------------------------------------- So just a couple here. So I guess, you're at 14 E-190s now and you'll have 3 that leave this year. If -- when -- based on now this current plan, where you're only going to grow 1% this year, when does the last E-190 leave the company property as of the current plan? And how does that compare to the phase-out of the E-190s that you were contemplating back in December at your Investor Day? -------------------------------------------------------------------------------- Jose Montero, Copa Holdings, S.A. - CFO [16] -------------------------------------------------------------------------------- Yes, Mike, we are assuming that the last E-190 leaves in the latter part of 2021. So call it in the fourth quarter of 2021. Whereas before, we had it leaving during the second quarter of 2021. So it's been shifted, you could argue, essentially by the amount of time that the MAX return to service has been delayed. -------------------------------------------------------------------------------- Michael John Linenberg, Deutsche Bank AG, Research Division - MD and Senior Company Research Analyst [17] -------------------------------------------------------------------------------- Okay. That's helpful. And then just looking at your CASM guide for 2020, the $0.063, you're flat versus 2019, which is actually quite good, given that you're only going to grow 1% capacity-wise. Under the prior plan, when you were considering 5% growth, what was the trajectory of CASM-ex? Was it $0.062, $0.061? I presume it was above $0.06 since we're trying to get there -- we're trying to get below that by 2021. Can you just talk about how that has shifted with the change of plan? -------------------------------------------------------------------------------- Jose Montero, Copa Holdings, S.A. - CFO [18] -------------------------------------------------------------------------------- Yes, we were in a faster trajectory to achieve our Sub-6 plan, Mike. And definitely, the lesser number of ASMs that we're deploying in 2020 or lesser growth in ASMs that we're deploying in 2020, the delay or sort of our road map into Sub-6. So that's, I think, what I would say that, that's essentially how we see it. So it would have been lower than where it is today. Although, of course, we have to say that as well, the fact that we are spreading out the exit of the E-190s also aided a little bit in that sense. We had a lot of inefficiency in terms of CASM because of aircraft being shifted from E-190s to MAXes. So that aided a little bit, but it was offset by the lower ASM growth. -------------------------------------------------------------------------------- Michael John Linenberg, Deutsche Bank AG, Research Division - MD and Senior Company Research Analyst [19] -------------------------------------------------------------------------------- Okay, great. And then just one last quick one here. Obviously, we're watching everything that's going on in China. Do you have a sense of like the China contribution to the Panama economy or even like the canal, when you think about the amount of throughput and how much of it actually represents trade from China? Do you have any sort of [impact --] so is it 20%, 25% of the Panamanian economy is directly/indirectly tied to Chinese commerce. Any thoughts on that? -------------------------------------------------------------------------------- Pedro Heilbron, Copa Holdings, S.A. - CEO & Director [20] -------------------------------------------------------------------------------- Yes. Well, Chinese commerce, it won't have a direct effect in terms of the -- Panama it's not an export economy, at least not we've not manufactured goods for commodities. We're mostly a service -- an international service economy. But I believe China is the #1 user of the Panama canal, if I'm not mistaken. So the canal could see a drop in revenues if the China trade with the world is reduced. I don't think it's going to have a significant impact in the revenue side, at least that's not what we've heard so far, but they are the #1 users of the canal. -------------------------------------------------------------------------------- Michael John Linenberg, Deutsche Bank AG, Research Division - MD and Senior Company Research Analyst [21] -------------------------------------------------------------------------------- Okay. And the canal is obviously a big part of your [economy] right? Maybe what I'm getting at? -------------------------------------------------------------------------------- Pedro Heilbron, Copa Holdings, S.A. - CEO & Director [22] -------------------------------------------------------------------------------- It is a very important part of our service economy. So -- but again, we don't trade that much with China. We are a services economy. So we should not have that big of an impact. But yes, the revenues of the canal could be affected. -------------------------------------------------------------------------------- Operator [23] -------------------------------------------------------------------------------- And our next question comes from the line of Hunter Keay with Wolfe Research. -------------------------------------------------------------------------------- Hunter Kent Keay, Wolfe Research, LLC - MD and Senior Analyst of Passenger Airlines, Aerospace & Defense [24] -------------------------------------------------------------------------------- Do you have a preferred outcome on this Sabre-Farelogix antitrust trial here in the U.S.? You mentioned, obviously, your work with Farelogix platform and your history with Sabre. I'm wondering if you have a dog in that fight? -------------------------------------------------------------------------------- Pedro Heilbron, Copa Holdings, S.A. - CEO & Director [25] -------------------------------------------------------------------------------- That was one question we were not expecting. -------------------------------------------------------------------------------- Hunter Kent Keay, Wolfe Research, LLC - MD and Senior Analyst of Passenger Airlines, Aerospace & Defense [26] -------------------------------------------------------------------------------- Well, there you go. -------------------------------------------------------------------------------- Pedro Heilbron, Copa Holdings, S.A. - CEO & Director [27] -------------------------------------------------------------------------------- So I don't want to comment much about that. That's in court in the U.S. And I think it's probably better if I don't say anything public. But we obviously want -- I mean we're clients of both Sabre and Farelogix. I think we're good clients of both of them. And we want an open flexible, competitive market and how -- the key is how that's protected, how that's attained more than who owns whom. But if obviously, if Sabre owning Farelogix puts that, what I just said at risk, well that wouldn't be a good thing for us or any airline. So I would say what's [I think]. -------------------------------------------------------------------------------- Jose Montero, Copa Holdings, S.A. - CFO [28] -------------------------------------------------------------------------------- It's up to the court, I guess, to decide it. -------------------------------------------------------------------------------- Hunter Kent Keay, Wolfe Research, LLC - MD and Senior Analyst of Passenger Airlines, Aerospace & Defense [29] -------------------------------------------------------------------------------- Yes. Well, I appreciate you adding that color given the legal proceedings, thanks for that Pedro. And then when I look at your utilization, it was down, I think, 5% last year, but stage length was only down 2.5%. So why was utilization down so much? How will you be able to keep CASM down, by the way, with that? And I guess the real question is, is there a -- sort of an opportunity here on the CASM side that might that we might be sort of under-appreciating or that you might be being conservative about in the event that you dial back utilization up again once the network and the fleet is sort of a normal run rate again? -------------------------------------------------------------------------------- Jose Montero, Copa Holdings, S.A. - CFO [30] -------------------------------------------------------------------------------- Yes, Hunter. Yes, this is Jose. So aircraft utilization was down because of the MAXes and the aircraft utilization numbers that we published, we are taking into account the 6 parked airplanes that we had for the majority of 2019. So [naturally], so that's all in. Those numbers are all in. -------------------------------------------------------------------------------- Hunter Kent Keay, Wolfe Research, LLC - MD and Senior Analyst of Passenger Airlines, Aerospace & Defense [31] -------------------------------------------------------------------------------- That explains it. -------------------------------------------------------------------------------- Jose Montero, Copa Holdings, S.A. - CFO [32] -------------------------------------------------------------------------------- And yes, yes. And so yes, absolutely when -- once the MAX situation is resolved, we will have significant opportunities for reducing our costs further without a doubt and that's our plan. -------------------------------------------------------------------------------- Operator [33] -------------------------------------------------------------------------------- And our next question comes from the line of Helane Becker with Cowen. -------------------------------------------------------------------------------- Helane R. Becker, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [34] -------------------------------------------------------------------------------- So I just have a couple of questions. One of the questions is with respect to getting to sub $0.06 nonfuel CASM by the end of next year, should we really think about that as kind of the end of 2022? Or is there a way to catch up as MAX deliveries start later this year? -------------------------------------------------------------------------------- Jose Montero, Copa Holdings, S.A. - CFO [35] -------------------------------------------------------------------------------- Helane, so let me recap because, yes, we, in our Investor Day, discussed our plan to reach Sub-6. So the plan had 4 components to it. One was the exit of the E-190 fleet. The second was a second MAX 9 configuration, or a more dense configuration on the MAX -- on a subset of the MAX 9 aircraft that we're receiving. A third was 737-800 densification program that we will start. And fourth, our overall savings initiatives. So out of those 4 initiatives, 2 of them are affected by the revised MAX schedule, which is the exit of the E-190 fleet and the second MAX 9 configuration. I would say that the Sub-6 plan will probably be in place by the end of the year. I -- at this time, because of the delay in the deliveries, I don't think that we'll achieve Sub-6 for the entirety of 2021, as we mentioned in our Investor Day. But I think that by the latter part of 2021, if you look at it, kind of take a picture of the last part of 2021, I think that's certainly doable. Of course, assuming that the MAX situation solves itself. And I think we also have to mention, something that Pedro mentioned earlier is that there's still somewhat of uncertainty in terms of what the delivery stream of MAX aircraft is going to be even after the return to service in terms of how many airplanes Boeing will be able to deliver monthly. -------------------------------------------------------------------------------- Helane R. Becker, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [36] -------------------------------------------------------------------------------- Okay. That's very helpful. Actually, Jose, because the other part of the question really is that the densification program, which you talked about at Investor Day and you talked about earlier today. Are you intending to postpone or delay any part of that while you wait for MAXes to come because would you have too many aircraft out of service at once? -------------------------------------------------------------------------------- Jose Montero, Copa Holdings, S.A. - CFO [37] -------------------------------------------------------------------------------- It could be. I mean, it could be that we have to adjust some of the scale, although a portion of the densification is going to be performed during scheduled maintenance of the aircraft. So you have the airplane already down for a C Check and you perform this. So it isn't really that somehow you are parking airplanes out of this. Now the other component of densification was the second MAX 9 configuration, right, the more dense MAX 9 configuration, and that could be delayed. So that's the reason why I focused on the Embraer-190 and the second MAX configuration as the one items that were more delayed. But the 737-800 densification, I would say that will probably proceed as planned. -------------------------------------------------------------------------------- Helane R. Becker, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [38] -------------------------------------------------------------------------------- Got you. And then just one of the things that I've seen a lot has been some pressure on not you guys, but to have service to London. I mean there's -- right now, there's one-stop service to London over various cities, including Madrid and Amsterdam, but the -- I know the government would like to see nonstop service, although that's a relatively small market. Is that something that you would -- trying to encourage with some of the -- with some of your international partners? -------------------------------------------------------------------------------- Pedro Heilbron, Copa Holdings, S.A. - CEO & Director [39] -------------------------------------------------------------------------------- Yes, okay. It's Pedro, Helane. None of our partners -- none of our partners are London or U.K. based so I don't think any of them would fly London, Panama, nonstop. But I do think it's an interesting market. It's an important business market. It's a -- London is a financial center, so is Panama. And also Panama, I think, could be an attractive destination for passengers from the U.K. and from England. So I can understand our government pushing for that service. But again, I don't think it will be one of our partners serving it. -------------------------------------------------------------------------------- Helane R. Becker, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [40] -------------------------------------------------------------------------------- Okay. And then finally, my last question is, the trends in yield, Jose, that started in the fourth quarter, have they continued into the first quarter? -------------------------------------------------------------------------------- Jose Montero, Copa Holdings, S.A. - CFO [41] -------------------------------------------------------------------------------- Yes. We're seeing good trends in terms of the first quarter so far, system-wide. Again, I mean, it's fair to say that the comps for Q1 of last year were still -- last year were still in a recovery mode in the region. But yes, the trends are positive for Q1. -------------------------------------------------------------------------------- Operator [42] -------------------------------------------------------------------------------- And our next question comes from the line of Rogério Araújo with UBS. -------------------------------------------------------------------------------- Rogério Araújo, UBS Investment Bank, Research Division - Director and Equity Research Analyst [43] -------------------------------------------------------------------------------- A couple of questions here on our side. First, if you could provide us some color on the demand and supply by region. So where does this strong demand is coming from? If Avianca Holdings' capacity reduction in Colombia is helping somehow? If the Brazilian demand is strong despite the Brazilian reais depreciation? Maybe lastly, if Argentina demand is getting worse? Or if it's stable, so if you could provide some color on demand and supply for the regions would be great. That's the first question. -------------------------------------------------------------------------------- Pedro Heilbron, Copa Holdings, S.A. - CEO & Director [44] -------------------------------------------------------------------------------- Okay? So this is Pedro here, and I'll try to answer and then let Jose fill in anything. But in general, I would say that capacity is stable. We're not seeing a rapid capacity growth or actually not much capacity growth overall in the first quarter. There are always some exceptions from -- especially from North America coming South, but pretty much stable, not a lot of capacity growth in the first quarter. In terms of demand, overall, most of our markets look fine, look healthy. Maybe Chile is the one that is down versus the year before, so we see more weakness in Chile. The rest look okay, and even Argentina looks okay. Obviously, it's not what it used to be. But it was weak a year ago in the same quarter. So this quarter is not a very difficult comp. -------------------------------------------------------------------------------- Jose Montero, Copa Holdings, S.A. - CFO [45] -------------------------------------------------------------------------------- And one -- just to add a little bit of color to Argentina. The market has taken out some capacity from there. So that has aided a little bit. So there's been -- that's a Q1 2020 versus Q1 2019, there's less deployment of seats in the market. -------------------------------------------------------------------------------- Pedro Heilbron, Copa Holdings, S.A. - CEO & Director [46] -------------------------------------------------------------------------------- Double digit. -------------------------------------------------------------------------------- Jose Montero, Copa Holdings, S.A. - CFO [47] -------------------------------------------------------------------------------- Yes, yes, yes. -------------------------------------------------------------------------------- Pedro Heilbron, Copa Holdings, S.A. - CEO & Director [48] -------------------------------------------------------------------------------- Double-digit capacity is out of the market, including ourselves. -------------------------------------------------------------------------------- Rogério Araújo, UBS Investment Bank, Research Division - Director and Equity Research Analyst [49] -------------------------------------------------------------------------------- Sounds great. What about Avianca Holdings reduction in capacity in Colombia? Is it helping somehow? -------------------------------------------------------------------------------- Pedro Heilbron, Copa Holdings, S.A. - CEO & Director [50] -------------------------------------------------------------------------------- Well, I would say that it hasn't made that much of a difference to us. In the sense that the capacity they've taken out was not capacity we competed against. It's mostly capacity in Central America and Peru that did not overlap as much and some of the capacity they've added is in Bogotá, which competes a little bit more against us. So net-net, maybe even or maybe a little bit more competition, but again, not a significant impact. -------------------------------------------------------------------------------- Rogério Araújo, UBS Investment Bank, Research Division - Director and Equity Research Analyst [51] -------------------------------------------------------------------------------- Perfect. Yes, very clear. And my second question is on Boeing's compensation. If it's going to enter as a gain in the income statement and maybe the expected timing? And if so, is it included in the 2020 guidance? -------------------------------------------------------------------------------- Jose Montero, Copa Holdings, S.A. - CFO [52] -------------------------------------------------------------------------------- No. Rogério, first of all, it's very early in the process in our discussions with Boeing, and these are discussions that are for confidential nature -- we expect to be fairly compensated. And no, there isn't any assumption in our guidance related to -- anything related to the MAX or compensation from Boeing. -------------------------------------------------------------------------------- Pedro Heilbron, Copa Holdings, S.A. - CEO & Director [53] -------------------------------------------------------------------------------- Yes, and we're not 100% sure how it would be booked when it happened. -------------------------------------------------------------------------------- Jose Montero, Copa Holdings, S.A. - CFO [54] -------------------------------------------------------------------------------- Yes, from an accounting perspective. -------------------------------------------------------------------------------- Pedro Heilbron, Copa Holdings, S.A. - CEO & Director [55] -------------------------------------------------------------------------------- From accounting perspective. Yes. -------------------------------------------------------------------------------- Operator [56] -------------------------------------------------------------------------------- And our next question comes from the line of Dan McKenzie with Buckingham Research. -------------------------------------------------------------------------------- Daniel J. McKenzie, The Buckingham Research Group Incorporated - Research Analyst [57] -------------------------------------------------------------------------------- Yes. That question actually is a good segue into one of my questions. And that was with respect to the imbursement. Any initial thoughts on how you might use the cash? Would it just be aircraft discounts? Or could it potentially be used for capital returns. Just wondering if you have any initial thoughts? -------------------------------------------------------------------------------- Pedro Heilbron, Copa Holdings, S.A. - CEO & Director [58] -------------------------------------------------------------------------------- Dan, not really. We try not to spend the money before we have it. And -- but no, we have not thought of that or there's nothing there that we can share, to be honest. -------------------------------------------------------------------------------- Jose Montero, Copa Holdings, S.A. - CFO [59] -------------------------------------------------------------------------------- Yes. Very early on. -------------------------------------------------------------------------------- Daniel J. McKenzie, The Buckingham Research Group Incorporated - Research Analyst [60] -------------------------------------------------------------------------------- That makes sense. A question on putting the MAXes back in the air. I think earlier, you'd mentioned you could do it in 2 to 3 weeks. And I guess, I'm wondering, does that mean that a 1-year booking window might be consolidated to a 2-week booking window to fill the planes? Or do you simply mean that they will be put back as spares? And then I guess, just related to, I'm wondering what 2021 growth might look like once you get the MAXes back up and running? -------------------------------------------------------------------------------- Pedro Heilbron, Copa Holdings, S.A. - CEO & Director [61] -------------------------------------------------------------------------------- Okay. So I'll answer the first part of the question. The 6 MAXes we have grounded are open for sale -- you can book on those flights after September 1. So we have canceled the flying of those 6 MAXes until the end of August of this year, but the remaining schedule, it's open. So if we're sure that it's going to fly again sometime before September 1, the bookings keep on happening. So it won't be a short booking curve. The MAXes that have not been delivered since we do not know when they will be delivered, those are not available for booking. So the flight -- schedule that those MAXes will fly is not open for bookings. And there, we have to work with Boeing and when we have some certainty on the delivery date, then we will open them up for booking and it will -- I mean we'll try to make that booking window as long as we can. -------------------------------------------------------------------------------- Jose Montero, Copa Holdings, S.A. - CFO [62] -------------------------------------------------------------------------------- Dan, in terms of 2021 it is, of course, very early on. And I think that I want to highlight something in our fleet plan. And of course, the 2021 growth depends a lot on what the delivery stream ultimately ends up being for the MAX aircraft that we have. And so it's premature yet to determine what it will be. But the one thing I wanted to highlight is that we have still a lot of flexibility in our fleet plan in terms of leased return airplanes that for which we have extension options and other type of flexibility measures that we could have to adjust our capacity terms or how we see demand at that moment. -------------------------------------------------------------------------------- Daniel J. McKenzie, The Buckingham Research Group Incorporated - Research Analyst [63] -------------------------------------------------------------------------------- Yes, understood. Okay. If I could squeeze one last one in here. I think once upon a time, we were looking for 10% growth or double-digit growth in 2020. Of course, that was reduced to 5% and today, 1. And I guess the question is, for the first quarter here, how much revenue management friction is there in the revenue outlook from demand that might have been revenue managed differently? So it seems to me that advanced bookings might be a bigger percent of the business or bookings on the books than you might have otherwise wanted. And so I'm just wondering to what extent that potentially is diluting RASM relative to what it might have otherwise been? -------------------------------------------------------------------------------- Jose Montero, Copa Holdings, S.A. - CFO [64] -------------------------------------------------------------------------------- Well, I think that one thing that I would say -- I'll answer that, and let me just answer it in a couple of ways. One is that our Q1 is looking positive in terms of RASM. But certainly, I think you would have had the additional capacity, I think, we would have probably grown earnings over this time period. So yes, I think that we are -- there are some opportunities in terms of our earnings, that would have been here, if we would have had the additional capacity deployed during the period. -------------------------------------------------------------------------------- Pedro Heilbron, Copa Holdings, S.A. - CEO & Director [65] -------------------------------------------------------------------------------- Yes. I mean, the short answer is, we need those airplanes back flying and we're giving up revenue opportunities and profit opportunities by not having our complete fleet. But we're managing as best as we can with what we have. -------------------------------------------------------------------------------- Operator [66] -------------------------------------------------------------------------------- And our next question comes from the line of Bruno Amorim with Goldman Sachs. -------------------------------------------------------------------------------- Bruno Amorim, Goldman Sachs Group Inc., Research Division - Equity Analyst [67] -------------------------------------------------------------------------------- I have 3 questions. The first one is a follow-up on Argentina. I remember a few quarters ago, you have mentioned that it took some time for you to be able to grow as much as you want to in Argentina. And now you are pulling back some capacity, of course, because of the macro environment. So the question is, have you in the market, adjusted capacity to a point where the market is profitable? Or is it still kind of a strategic allocation for when the markets come back? The second question is on the growth prospects, looking more medium, long term. For the past couple of years, we have been discussing recovering margins from the lows in 2018. But now according to your guidance, you could deliver margins very similar to the historical average and maybe even better in 2021 with the MAXes in the fleet during the full year. So is it fair to say that from 2021 onwards, the company would be back to growth mode? And what do you believe would be the sustainable pace of growth then? And lastly, a quick question on the guidance. You have raised the range for EBIT margin by around 2 percentage points, which can be fully explained by the lower fuel prices. But on top of that, there is also some negative news on the timing of the MAXes. So what's offsetting the negative impact on the guidance from the MAXes that have been delayed? So those are the 3 questions. -------------------------------------------------------------------------------- Pedro Heilbron, Copa Holdings, S.A. - CEO & Director [68] -------------------------------------------------------------------------------- So let me try like to answer a few of those questions. This is Pedro and then Jose can back me up. So we have reduced capacity a little bit over 11% ASMs versus the same quarter the year before in Argentina. And we're doing better than what we would have otherwise been doing. And I would say, overall, Argentina, it's in the black and not in the red, but it's not doing great, of course, because yields are way down and so it's not what it used to be. But I think we're on track as the economy normalizes, if that happens, we're on track to decent performance in Argentina, but it's not great right now. We try not to share on per route or per market results or performance, but it's -- you know, it's what it is. The yields are still down and it's not great. The capacity reductions have helped. In terms of growth rate going forward, we don't want to get ahead of ourselves. But obviously, 2019 and 2020 were not normal years. These were years where we could have done much better and flat growth or negative growth like last year. And if everything continues developing the way it is right now, the markets continue strengthening and getting back to normal, growth should be much better in 2021 and years to come. But again, we don't want to get ahead of ourselves. -------------------------------------------------------------------------------- Jose Montero, Copa Holdings, S.A. - CFO [69] -------------------------------------------------------------------------------- And again, we keep a lot of flexibility in our fleet plan. Bruno, so therefore, we are able to adjust our capacity with a relatively short time frame to adjust to where demand is. And you have to go back to saying that in Latin America, air travel demand is expected to grow at around 6% per year for the next 20 years. So it's -- we keep a close eye on that, and we have a lot of flexibility in our fleet plan. And the final question that you had related to guidance, yes, our operating margin guidance that we just issued is mostly driven by fuel. The fuel curve is down recently, so therefore, that's what's driving the majority of the growth in EBIT margin. Yes, what it's offset by some MAX costs. This guidance and the $0.063 unit cost assumption assumes an unproductive 6 aircraft that we have for the majority of the year. That carries costs related to ownership and salaries and maintenance that are associated with these aircraft that have been parked and that will be parked for up until the end of August. So yes, there is a drag somewhat in there in terms of unit costs associated with that. -------------------------------------------------------------------------------- Operator [70] -------------------------------------------------------------------------------- And our next question comes from the line of Stephen Trent with Citi. -------------------------------------------------------------------------------- Stephen Trent, Citigroup Inc, Research Division - Director [71] -------------------------------------------------------------------------------- Just 1 or 2 for me. The first is could you remind us where we are with respect to the joint business agreement that you guys could be pursuing with United, Avianca and maybe Azul? And the second question, if you could refresh my memory, your extension into the new terminal at Tocumen, what that means in terms of jet bridges and maybe some potential increase in air traffic movements? -------------------------------------------------------------------------------- Pedro Heilbron, Copa Holdings, S.A. - CEO & Director [72] -------------------------------------------------------------------------------- Stephen, this is Pedro. The JBA is still there. And I think the 3 airlines, United, Avianca and Copa, are still very much interested in filing the JBA, and I think it's an important tool, which will be good for our passengers, good for the market and good for the airline. So the intent is still to file sometime this year. But everything that has happened, as we have mentioned before, at Avianca and the whole thing between Avianca, new management and United, everything that's going on has delayed the filing of the paperwork, but it should happen sometime this year. When? I'm not certain right now. -------------------------------------------------------------------------------- Jose Montero, Copa Holdings, S.A. - CFO [73] -------------------------------------------------------------------------------- Stephen, in terms of T2, right now, the expectation is for T2 to be fully operational during the latter part of Q3 of this year. But as of now, there is about -- I want to say, about 25% of the gates that are operational. And so there is a partial operation of a number of gates at the airport. And that's where it will be -- the next steps are for the rest of the gates to be open. And for the passenger service areas, ticket counters and arrivals area to become operational. -------------------------------------------------------------------------------- Operator [74] -------------------------------------------------------------------------------- And we do have a follow-up question from the line of Alejandro Zamacona with Crédit Suisse. -------------------------------------------------------------------------------- Alejandro Zamacona Urquiza, Crédit Suisse AG, Research Division - Research Analyst [75] -------------------------------------------------------------------------------- Sorry, I got disconnected, I don't know if they already answered the question. But -- it's just a follow-up question on the Boeing compensation. I know you already mentioned there is not much update to disclose. But I was wondering what would be the expectation of the type of compensation. Is it a cash compensation, acceleration in fleet deliveries, maintenance or spare parts? -------------------------------------------------------------------------------- Pedro Heilbron, Copa Holdings, S.A. - CEO & Director [76] -------------------------------------------------------------------------------- Yes. Yes, we don't want to comment on that right now because the discussions are going on, and we'll rather keep that for when it's official. -------------------------------------------------------------------------------- Operator [77] -------------------------------------------------------------------------------- And our last follow-up question comes from the line of Savi Syth with Raymond James. -------------------------------------------------------------------------------- Savanthi Nipunika Syth, Raymond James & Associates, Inc., Research Division - Airlines Analyst [78] -------------------------------------------------------------------------------- Sorry about that. Just a couple of more on the fleet. Just in the original kind of plan that was shared at the Investor Day, there were a couple of 800 retirements. Are they kind of just pushed to 2021? Or are they kind of pushed out further? And also just on MAX as we think about 2021, is there kind of any upper limit on how many aircraft that you can take delivery of in a year or if Boeing can deliver, would you look to kind of fully catch up by the end of 2021? -------------------------------------------------------------------------------- Jose Montero, Copa Holdings, S.A. - CFO [79] -------------------------------------------------------------------------------- So Savi, on that one, we executed some of the flexibility that we have in the plan. So we extended those 800s that were departing in the latter part of this year, and they were extended for beyond 2021. And in terms of the number of aircraft that we can take delivery of, I think that it will depend, first of all, on our expectation for demand and for growth and the flexibility, executions that we have in our plan. And then also, the other question that comes into play is what is Boeing's capability for delivering airplanes, depending on what the FAA, how that process is, et cetera. So it's still -- those are, I would say, 2 main drivers in terms of how many airplanes can be delivered. -------------------------------------------------------------------------------- Savanthi Nipunika Syth, Raymond James & Associates, Inc., Research Division - Airlines Analyst [80] -------------------------------------------------------------------------------- Makes sense. And just on the E-190s, there were some return costs. Are those return costs showing up this year? Or do those get pushed out to next year and as we kind of think about the puts and takes in next year's costs? -------------------------------------------------------------------------------- Jose Montero, Copa Holdings, S.A. - CFO [81] -------------------------------------------------------------------------------- Yes. Some of them are going to show up in 2021, yes, because they're related to the aircraft -- to the individual aircraft. -------------------------------------------------------------------------------- Operator [82] -------------------------------------------------------------------------------- And this concludes today's question-and-answer session. I would now like to turn the call back to Pedro Heilbron for any closing remarks. -------------------------------------------------------------------------------- Pedro Heilbron, Copa Holdings, S.A. - CEO & Director [83] -------------------------------------------------------------------------------- Okay. Thank you. Thank you all. This concludes our earnings call. Thank you for being with us. And thank you for your continued support. Have a great day, and have a great 2020. Thank you. -------------------------------------------------------------------------------- Operator [84] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for your participation. That concludes this presentation. You may disconnect. Have a wonderful day.