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Edited Transcript of PFAVH.BG earnings conference call or presentation 28-Feb-20 1:00pm GMT

Q4 2019 Avianca Holdings SA Earnings Call

Panama Mar 25, 2020 (Thomson StreetEvents) -- Edited Transcript of Avianca Holdings SA earnings conference call or presentation Friday, February 28, 2020 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Adrian Neuhauser

Avianca Holdings S.A. - CFO

* Anko Van Der Werff

Avianca Holdings S.A. - Executive President & CEO

* Luca Pfeifer

Avianca Holdings S.A. - IR Officer

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Conference Call Participants

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* Camilo Andres Roldan Romero

Corredores Davivienda S.A., Research Division - Equity Analyst

* Manuela Echavarría Cuartas;Credicorp Capital;Analyst

* Michael John Linenberg

Deutsche Bank AG, Research Division - MD and Senior Company Research Analyst

* Miguel Ospina

Compass Group S.A. Comisionista De Bolsa - Senior Investment Analyst

* Ricardo Andres Sandoval Carrera

Bancolombia S.A., Research Division - Research Analyst

* Rogério Araújo

UBS Investment Bank, Research Division - Director and Equity Research Analyst

* Stephen Trent

Citigroup Inc, Research Division - Director

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to the Avianca Holdings Fourth Quarter 2019 Earnings Call. (Operator Instructions) As a reminder, today's call is being recorded.

I would now like to turn the conference over to our host, Mr. Luca Pfeifer, Director of Investor Relations. Mr. Pfeifer, please go ahead.

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Luca Pfeifer, Avianca Holdings S.A. - IR Officer [2]

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Thank you, Rob, and thank you all for joining today's call. As on prior occasions, we will be simultaneously translating this earnings result conference from English to Spanish. Anko Van Der Werff, our CEO, will begin today with remarks related to the company's operational progress and results. Adrian Neuhauser, our CFO, will then provide a review of our financial performance. We'll move then forward to brief closing remarks and Q&A session with Anko and Adrian.

As a reminder, before we begin, today's discussion contains forward-looking statements about the company's future business and financial performance. These are based on management's current expectations and are subject to risks and uncertainties. Factors that could cause actual results to differ materially are included within today's presentation slides and in our reports on file with the SEC.

With that, let me turn it over to Anko. Anko, please go ahead.

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Anko Van Der Werff, Avianca Holdings S.A. - Executive President & CEO [3]

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Thank you, Luca. Good morning, and thank you, everyone, for joining our fourth quarter 2019 call. The past 12 months have proven to be very challenging, and which is why, as you know, 6 months ago, Avianca's new management team launched a financial reprofiling plan, at the end of the second quarter to be specific, to ensure that our company would operate with adequate liquidity.

During this time, we also identified our Avianca 2021 Strategic Plan, which is focused on returning the company to a path of margin expansion, sustainable and competitive growth and conservative cash reserves. The 4 pillars of our plan are as follows: first, a focus on Avianca's financials, strengthening operating margins while maintaining disciplined capital investments and generating consistent cash flow to achieve suitable leverage levels by 2021; second, operational efficiency throughout our organization, rationalizing with an eye towards optimizing overall profitability and eliminating insufficient subfleets; third, a focus on the Avianca customer, streamlining our network and leveraging our branded fares to tailor our offering to our customers' needs, provide ancillary options and enhance our overall customer experience with the benefit of Avianca's awards-winning LifeMiles program, all while running a more consistent operation; and finally, our fourth pillar looks inward to focus on the Avianca team across our organization, strengthening our corporate culture, evolving to a best practice-focused mindset and transforming groups of colleagues into a single team is key to achieving our ambitious plans and strategy.

And today, we're leveraging our best talent in a way that ensures we avoid corporate silos and work together as a far more cohesive team. I'm proud to note that the entire Avianca team has maintained an unwavering focus on executing to ensure our success, and I'd like to thank all of our employees for their drive and dedication.

Starting with our first and, some would say, most urgent matter from a financial perspective, we were extremely pleased and finished our restructuring with the conclusion of Avianca's reprofiling this past December. As you recall, we successfully closed Avianca's bond exchange offer in November, with the strong participation of more than 88% of our outstanding bonds extending the maturity to May 2023. And in addition, as previously disclosed, we were able to draw $250 million stakeholder financing from United Airlines and Kingsland Holdings as well as an additional $125 million from other market participants.

Moving on to the progress over the last 6 months related to our second pillar, the operational efficiency. Since implementing our new strategy, we suspended 25 unprofitable routes, streamlining our network and redeploying the fleet capacity. The resulting 2.6% capacity reduction for the second half of 2019 and 6.9% for the fourth quarter let our adjusted unit cost to fall by 3.1%. We further streamlined and rationalized our fleet during the fourth quarter, reaching an agreement to reduce Avianca's outstanding Airbus A320neo order book from 108 to 88 aircrafts. The 88 remaining commitments are scheduled for delivery from 2025 through 2029.

To complement this delivery schedule, we also agreed to lease up to 12 Airbus A320 aircraft from BOC Aviation to be delivered between 2023 and 2024.

The Airbus agreement provides meaningful financial benefits and significant CapEx reduction through the end of 2024. And along these lines, we successfully eliminated a total of 10 Airbus A318 and 4 Airbus A320 aircraft from our fleet. From $100 million in total net cash proceeds, closing 2019 to achieve our targeted total of 145 passenger jet aircraft operation. We're making continued progress in this regard, having sold 10 Embraer E190 aircraft at the beginning of the first quarter of 2020.

Turning to our third pillar. During the fourth quarter, we achieved an important milestone with the sales launch of our branded fare products in Ecuador and Colombia domestic markets. This move (inaudible) segment our customers to provide each group with the offerings they find most appealing. It also attracts -- it also better attracts those passengers particularly sensitive to cost as an important competitive tool in today's low-cost environment, with 3 economy and 2 premium fare brackets.

Further, airfare segmentation provides a much more meaningful advantage. It enables us to better monetize the premium elements of the Avianca travel experience, which currently exists. We will continue to roll out the products across our international network in the coming months.

In complementing the choices we're now offering Avianca customers, we continue to implement incremental adjustments to our network, leveraging our Bogotá hub's privileged geographic location while further building on the on-time performance improvements achieved so far. As such, we will be adding new destinations from our Bogotá hub to improve our customer connectivity while focusing on our new corporate's mission, which is planes on time, bags on time. And you've heard me say this before, the back-to-basics principle.

To share just a few examples. This coming June, Avianca will increase flights to Rio de Janeiro and São Paulo as well as begin operations to

Porto Alegre, therefore operating 40 weekly flights between Bogotá and Brazil. Brazil will, therefore, be the fifth country from which Avianca will have more than 40 weekly departures, after Colombia, United States, Ecuador and Peru. It also brings us to 32 international destinations from our Bogotá hub.

Avianca's customer satisfaction remains the central driving force of all of our efforts and an area where we continue to excel. And I'm proud to comment that we successfully maintained and also strengthened our best-in-class products over the last 6 months, with further improvements planned to enhance and expand the award-winning travel experience for which we are known and is most relevant to our clients.

In line with these efforts, we were honored to be one of only 13 5-star airlines in the world to have received the APEX Airline Passenger Experience Association Award for Best Airline in South America. I therefore like to take this opportunity to also express my thanks to our more than 20,000 employees across Avianca for their passion in delivering outstanding service to our customers through a dynamic and challenging time. Their dedication is an important driver of our continued success.

Along these same lines, Avianca's on-time performance improved by more than 5 full percentage points throughout the fourth quarter when compared to the same period in 2018. In January, we were above 80%. And also, now in February, things look very solid.

Finally, also related to our strategy's fourth pillar, we're focused on our team and on actively engaging with our employees. We recently created a new Chief Planning Officer role at Avianca, focusing on routes, networks and the strategic positioning of our company. And we are pleased that Michael Swiatek has joined Avianca in this new role, with the benefit of more than 20 years of relevant industry experience. And the many changes implemented throughout our organization therefore dovetail with our unwavering focus on operational excellence.

With that, let me now hand over the call to Adrian, who will review our financial performance. I'll rejoin you for my closing remarks and share our expectations for the year ahead. Adrian, over to you.

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Adrian Neuhauser, Avianca Holdings S.A. - CFO [4]

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Thank you, Anko. We're very pleased with the results of our efforts, particularly, the bond exchange to which Anko referred. To reiterate the details, the new bond pays a 9% coupon and matures in 2023. And obviously, the bond I'm referring to is the exchange bond that addressed over 88% of our 2020 maturities.

I'd like to draw your attention to the fact that the bond consistently traded well above par throughout January. In addition, we reached agreement with substantially all of our creditors and lessors on reprofiling terms, which ultimately allowed us to draw the $250 million United Airlines and Kingsland Holdings stakeholders' facility as well as raise an additional $125 million from other market players in similar convertible structures.

As was previously announced, the United Airlines and Kingsland financing matures in 4 years, with a 3% payment-in-kind annual interest rate and is convertible into AVH common shares at United and Kingsland's discretion or at the election of Avianca, subject to certain conditions. More related details can be found in the press release that we published in December 9 -- on December 9 of 2019.

The $125 million in additional financing were secured from private third parties as well as an investment vehicle managed by Citadel Advisors LLC, and 100% of this $125 million has been funded as of today. This is another endorsement of the market's confidence in the strategy we have in place and the success of our company's future. As a result, KPMG, our auditor, removed its going concern qualification, and we have now again reclassified $2.6 billion that we had moved to short-term debt back to long-term debt as a result of the successful conclusion of our reprofiling process.

Turning to our fourth quarter results. On Slide 7, I will first review certain onetime events impacting our P&L this quarter, the most relevant of which are related to the implementation of our 2021 Strategic Plan as well as 2 accounting changes we've implemented since initiating Avianca's turnaround process, and as we continue to strengthen and recalibrate Avianca's accounting policies. I will then move on and review our non-GAAP financials for the period.

First, we are adjusting our depreciation and amortization expense to reflect the sale and leaseback agreements we entered into at year-end 2019 for 15 of our Airbus A320 aircraft. These sale and leaseback contracts were closed under very attractive financial conditions for Avianca and will be executed during the first quarter of 2020, strengthening our balance sheet and providing the company with additional working capital. It's also a clear endorsement of our counterparties' confidence in the Avianca 2021 plan.

Further, our Board of Directors authorized management to begin the process of selling additional aircraft currently within our fleet: 2 Airbus A330, 2 Airbus A319 and 1 Airbus A320 passenger aircraft; as well as 1 A330 cargo aircraft, allowing us to provision this depreciation and amortization loss in 2019. Passenger revenues were executed by 17.1 -- were adjusted, apologies. Passenger revenues were adjusted by $17.1 million as we updated the percentages to calculate and recognize revenue from unused and expired tickets to more accurately reflect current passenger behavior.

The increase in maintenance and repair expense was due to the Embraer fleet disposal that Anko already referred to. And selling expenses were affected as we reconciled outstanding sales commissions with travel agencies as well as Oceanair sales write-offs. Finally, fees and other expenses increased due to higher professional services costs required for the turnaround plan. We're also recognizing an adjustment to salaries, wages and benefits due to severance payments as we continue to rightsize the organization.

Moving on to our non-GAAP financials. Total revenues decreased 5% year-on-year as the number of passengers transported decreased 0.3% and the elimination of unprofitable routes, in line with our 2021 Strategic Plan. Results during the quarter were also adversely impacted by the weakened macroeconomic environment and local currency depreciation effects on our average fare. However, we've nevertheless continued to strengthen our OpEx, reflected in a 3.1% year-on-year decrease in unit costs adjusted for onetime events, reaching $0.059. As such, adjusted for onetime events, we achieved a 19.2% EBITDA margin for the fourth quarter of 2019 and an 8.4% EBIT margin to a 23% -- 23 basis point year-on-year increase.

Turning to the P&L on Slide 9. Jet fuel price decreased by 7.1% year-on-year during the fourth quarter of 2019, while our fuel consumption for the quarter decreased by 5%, in line with our focus on more profitable long-haul routes, resulting in a net decrease of approximately $33 million in fuel expenses for the company. In addition, flight operation expenses decreased by $39 million as Avianca significantly reduced its third-party aircraft wet leases. This is also a reflection of our successful network optimization during the quarter, in line with the Avianca 2021 Strategic Plan.

Further, passenger service expenses fell by 21.8% as we continue to rationalize our operations and leverage efficiencies. These effects were partially offset by a 12.8% increase in maintenance and repair expense as we update our methodology for aircraft provisioning and for loss on sale of obsolete inventory. Further, fees and other expenses increased mainly due to an increase in professional, legal and advisory fees related to the Avianca 2021 turnaround plan and, in particular, to the financial restructuring that we executed.

Finally, depreciation and amortization increased due to the implementation of IFRS 16, which requires the accounting of operating leases as assets and liabilities within financial statements. As such, operating leases are accounted for as incremental debt, in turn appreciating the period's depreciation and amortization.

Moving on to our current jet fleet status, we closed the sale of a total of 2 A320 and 9 A318 aircraft during the fourth quarter, reflecting the sales now of all 10 Airbus A318 and 4 aircraft -- A320 aircraft that we have previously announced, for net cash proceeds of approximately $100 million. In addition, all Embraer E190 aircraft that we had previously announced we would sell have since been sold February. We've therefore eliminated inefficient aircraft from our fleet and closed the year with a total of 145 jet aircraft.

From an operational perspective, you'll note on Slide 11 that Avianca's capacity for the quarter, as measured in ASKs, decreased 6.9% year-over-year, in line with the phase out of interest on the aircraft and resulting changes to our network, which I've already described. Accordingly, on the 1st of January 2020, we launched the beginning of our new network configuration with enhanced connectivity through the primary Bogotá hub, providing Avianca customers with more efficient connecting times. We'll continue to make incremental improvements throughout -- to our network throughout the year to further drive efficiencies.

Fourth quarter macroeconomic headwinds in Latin America resulted in a 2.9% year-on-year decrease in passenger yields to $0.092, mainly due to a 10.9% depreciation of the Colombian peso against the U.S. dollar. However, I'd like to underscore that we have moved more than 30 million passengers throughout the year and have maintained our solid load factor above 80% for the quarter and demonstrates that Avianca continues to be a traveler's or travelers' preferred choice.

Turning to our business units. I'd like to begin with a review of our cargo business unit. We continue to see pressure on the global cargo market due to overcapacity. Nonetheless, we were able to increase transported tons by 6.7% year-over-year while maintaining our load factors in line with our 2018 result. As such, we remain the most relevant player out of Bogotá, the largest air cargo hub in Latin America, and have reached a close second at Miami Airport.

Our loyalty company, LifeMiles, continues to demonstrate healthy membership growth, with a 9.4% year-on-year increase, reaching a total of 9.7 million members. Strong performance during the quarter was again driven by a 13.8% year-on-year expansion to our commercial alliances, enabling us to further strengthen our leading position as one of the most relevant loyalty companies in the region. In addition, our co-brand credit cards grew by 8.1% year-over-year, reaching a total of 734,000, allowing bank customers to earn miles on every credit card transaction and redeeming them across our partnership network.

Wrapping up, as Anko noted, 2018 has indeed been a very challenging year for Avianca on many fronts. In a short 6-month time frame, we swiftly turned our company around onto solid financial footing, executed on key plan-efficient initiatives and are ending the year well positioned for success, aligned with the Avianca 2021 Strategic Plan. We are very pleased with the enormous outpouring of support from our shareholders, creditors and key stakeholders and for the vote of confidence by United and Kingsland, which helped us arrive to where we are today.

With that, I'd like to turn it over to Anko for closing remarks and to discuss our 2020 guidance.

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Anko Van Der Werff, Avianca Holdings S.A. - Executive President & CEO [5]

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Thanks, Adrian. Yes, Avianca celebrated its 100 years operation in December. And I believe there's been a few years more remarkable for our company than 2019. Above all, as you can see, it's been an incredibly busy and successful 6 months. The favorable conclusion of Avianca's financial reprofiling, important internal changes and continued progress on Avianca's 2021 Strategic Plan have stabilized our capital structure for a solid foundation, which positions us for a strong start to 2020, which should be reflected as soon as the first quarter.

Demonstrated, we're delivering on operational excellence, which will lead to a sustained business model financially. As such, let me share the metrics on which we will measure ourselves in 2020. We estimate that our capacity measured in ASKs will decrease between 0% and 2% throughout the year, with transported passengers decline between 1% and 3%. And accordingly, we estimate that our load factors will stand between 80% and 82%.

With regards to other areas of guidance, in light of recent developments and related uncertainty regarding the potential coronavirus-related impact, we have decided to withhold formal full year guidance on certain metrics for the time being. However, excluding the potential impact of COVID-19, we would expect 2020 EBIT margin to be somewhere between 6% and 8%, consistent with our upward-trending profitability and in line with our Avianca 2021 plan.

In order to achieve that 6% to 8% EBIT margin for the year, our plan required us to achieve a 2% EBIT margin for the first quarter, which is traditionally and historically our weakest quarter due to seasonality. As such, we're currently providing a 2% to 3% EBIT margin guidance for the first quarter, in lieu of our full year guidance. Obviously, we are monitoring the situation related to COVID-19 and its related potential impact carefully, and we will take measures, as appropriate, should this be necessary. We expect to provide incremental guidance once we have more visibility.

In conclusion, we are committed to our transformation initiatives and to delivering on our commitments, building on our important achievements thus far. We will continue to streamline our operations to make Avianca a more agile competitor with sustainable margin expansion. I'm particularly proud of what our team has accomplished across our organization in such a short time, and I'm confident that we have all the elements in place to be successful over the long-term as a carrier of choice to, from and within Latin America. Thank you very much.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Michael Linenberg with Deutsche Bank.

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Michael John Linenberg, Deutsche Bank AG, Research Division - MD and Senior Company Research Analyst [2]

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Anko, Adrian, just a couple here. Obviously, we can see what your cash position was at year-end. But subsequent to that, there have been a few transactions, including some aircraft sales that have closed recently. Can you tell us what that cash and cash equivalents, short-term investments, what that number looks like maybe as of today or just the latest date available?

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Anko Van Der Werff, Avianca Holdings S.A. - Executive President & CEO [3]

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Adrian, do you want to take that one?

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Adrian Neuhauser, Avianca Holdings S.A. - CFO [4]

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Yes, sorry, I was -- so Mike, as you announced -- and a clear example of that is the -- we made the sale leasebacks that we already mentioned, where we took the accounting charge for the sale in December, but we have not yet booked the cash. We're booking it throughout the quarter. So as of right now, we're sitting on over $600 million of cash, closer to $650 million. And that's the level that we expect to remain at roughly throughout this quarter.

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Michael John Linenberg, Deutsche Bank AG, Research Division - MD and Senior Company Research Analyst [5]

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Okay. That's great. And then -- that's a good data point, significantly higher than what you see on the release, but obviously, given the timing, so that's helpful. And then one other, just, Anko, this move to improve connectivity at Bogotá. Just maybe to give us some context around Bogotá as a connection hub today, what is the rate of connections? Like what percent of passengers connect on your system, connect through Bogotá today, connect versus local? And what's the goal? Like, where do you see Bogotá going 2021, 2022 as you ultimately build out the plan?

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Anko Van Der Werff, Avianca Holdings S.A. - Executive President & CEO [6]

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Yes. Yes, perfect. So I think there's also a reference to what we've shared earlier on that are -- the number of city fares that we will put through Bogotá this year already will increase north of 20%, with the network changes that we have done. And there's another 15% that we at least have in the pipeline for 2021. If you look at our connecting passengers at the moment, I think it's in line with some of the other medium hubs -- let's say, medium-sized hubs in somewhat bigger markets, not in bigger hubs in smaller markets. So we're currently around the 35%. And I think that definitely has an opportunity to increase towards the 50%, right? And that's of course a longer-term play.

As you know, it takes time to build out hubs. But hey, if every year we can do around somewhere between 10, 20, clearly, as I said, I mean, the first year, you start out with the biggest gain in that sense because you can be the biggest bank adjustments. And that's what you'll see in the next 12 months. And then gradually, of course, that percentage will come down. But then definitely within, let's say, the short, medium term, 5 years, you would get to a much more balanced portfolio of far more connecting traffic.

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Michael John Linenberg, Deutsche Bank AG, Research Division - MD and Senior Company Research Analyst [7]

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Okay. Great. And just one quick last question, the rationale to only provide March rather than full year. Obviously, you're watching everything that's going on around the world right now with COVID-19, but was that also done because you're actually starting maybe to see some softness? Or was it just that you wanted to err on the side of caution and...

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Anko Van Der Werff, Avianca Holdings S.A. - Executive President & CEO [8]

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Yes, yes. No, Mike, it's definitely the latter. Listen, we have, of course, seen and heard everything that goes on around this. But you have to realize, and you definitely know this, we don't have any exposure to any of the first markets that were impacted, right? We don't fly to China. We don't fly to Asia. We don't even have direct flights into Italy. So quite frankly, if you look at the first few weeks of corona or COVID, yes, we haven't seen anything. I mean there's so little exposure to us to China and Italy. I mean if you combine that, it's probably even -- you're right, it's around maybe $1 million a month or something. And even that, we hadn't seen.

So where we were preparing for earnings goal and for the outlook, yes, really until this week, we haven't seen anything. Now, of course, we see now that it goes into other markets. We don't now see that potentially, there is more impact in other markets in Europe, and then the picture could change. But let's be frank, we don't have exposure to Asia. We haven't seen much, if at all, definitely not during January and February, and now we have to monitor it. So I think that's a very different picture from what some of the big guys in the United States or Europe have seen. But hey, we were trending well, right?

Again, we were -- we wanted to guide you to a 6% to 8% for this year. Now that is something that, at this moment, looking around us, we say, "Okay, well, maybe that's irrelevant almost to do at this moment, right? Let's focus more on short term." In order to get to that 6.8%, we have said, "Well, then the first quarter should have come in around 2%, and we're now above 2%. " So we're now guiding still for the first quarter to 2% to 3%. And then we'll see what happens over the next few weeks with potential impact of corona. I hope that makes sense.

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Operator [9]

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Our next question is from the line of Stephen Trent with Citi.

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Stephen Trent, Citigroup Inc, Research Division - Director [10]

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First question from me. Could you refresh my memory as to your longer-term strategy with the LifeMiles program? I know there's been some private equity involvement there. And if you could just refresh my memory on what the strategy is there?

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Adrian Neuhauser, Avianca Holdings S.A. - CFO [11]

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Sure. Sure, I'll take that, Anko. Look, I think we -- Advent has been our partner in the program now for several years, and they've brought best-in-class benchmarking, governance, et cetera, to the program. They've been a tremendous partner. And as we keep reiterating on each of these calls, we're extremely proud of the program, of the program's management, of what the program's achieved, et cetera. As of right now, we're very comfortable in that position. We continue to invest in the program. We continue to love the way it's growing.

Obviously, Advent is a temporary player. It's the nature of financial investors. We're nowhere near a point where they are in a rush to exit, and they're very happy with the investment. But obviously, as they decide what they intend to do with that going forward, we'll adjust our strategy accordingly. But as of right now, we're very comfortable where we are.

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Stephen Trent, Citigroup Inc, Research Division - Director [12]

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Okay. Appreciate that. And going down the road, you certainly telegraphed that we should see balance sheet improvements over the medium term. Could you envision longer-term potentially reacquiring that 30-some-odd-percent stake in LifeMiles as some of your South American competitors have made moves?

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Adrian Neuhauser, Avianca Holdings S.A. - CFO [13]

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Well, I think, again, it's -- there's 2 parts to it, right? There's a financial decision and a strategic decision, right? From a strategic standpoint, we love Advent as a partner. We're happy having a partner like Advent. And if we have a partner like Advent, we are comfortable having third-party involvement. And so whether that's Advent, or whether Advent -- or whether that's someone that replaces Advent but that has a similar philosophy, that is not a position that we're uncomfortable in. Now obviously, if there's an opportunity for us to acquire it and acquire it at the right price, and we have the ability to do that with -- while maintaining a solid balance sheet, it's something that we would be remiss not to consider. So we would obviously look at it, but it's not something that's in our [immediate path].

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Operator [14]

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Our next question is from the line of Ricardo Sandoval with Bancolombia.

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Ricardo Andres Sandoval Carrera, Bancolombia S.A., Research Division - Research Analyst [15]

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I have some questions about your balance sheet. The first one is given the COVID-19 virus environment, I was wondering how difficult for you will be to sell that assets held for sale that you have on the balance sheet? I mean, I suppose, some airlines have their CapEx on hold right now for the COVID-19. I'm just wondering if you see any more difficulties to sell those assets held for sale. That will be my first question.

My second question is assets for held on the balance sheet totalized $681 million. And I'm just wondering if we can assume that all of that money will become cash? Or how would be a conservative discount rate to assume over that amount of money on the balance for the sale of those assets to become cash? That will be my second question.

So my third question is just -- been a little bit curious. You borrow $375 million from United and Kingsland, but your cash on the balance just increased $130 million. So I'm just wondering if you can maybe give us some details about where that money that you collect -- I mean, sorry, where did it go, that money that you collected from United and Kingsland.

And finally, my fourth question is about your short-term debt. Well, for us, $872 million in short-term debt is still too much for the cash flow projected for Avianca, I mean, here in Bancolombia. I'm just wondering if you can comment about what plans do you have to confront that short-term debt. If you maybe need to roll over more debt as we see a cash flow not -- I mean not bigger enough to confront this. What would you be -- what would be your evaluation about the financial flexibility of Avianca right now?

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Adrian Neuhauser, Avianca Holdings S.A. - CFO [16]

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Sure. So that's a lot of questions, and I'm not -- let me start addressing them and then tell me if I leave any of them out. But look, I think the first one is on the assets held for sale, right? There's 2 buckets in the asset held for sale, and it's not obvious when you look at the number, right?

But a very, very large portion of that is 15 aircraft that we agreed to sell and lease back in a financial transaction. And that financial transaction is committed. And we have -- it's 15 aircraft, you have to close them one by one. And every one of those is a sale, and a sale of an aircraft is not a simple thing from a logistical standpoint. The aircraft has to be grounded. It has to be reregistered, et cetera. So that is scheduled to happen throughout the quarter. We've already closed down a substantial portion of that through this quarter, and we see no reason to believe there's any risk to the continued closing of that. So that's a very large portion of that.

The remaining portion are 2 319s, 1 320, 2 330 passenger aircraft and 1 330 freighter. None of those -- your question went to the proceeds of that. None of those are net cash positive for us in any substantial way. All of those have to do with cleanup of the fleet to rationalize our operations, and all of those are together roughly cash flow neutral to us. So while I take your point that we may not have visibility to whether those aircraft -- or whether those transactions are feasible today, and again, maybe they will be in a few months, but they are also not urgent to us, right? And we can continue to operate those aircraft. And those aircraft cover their cost of operation, right?

So it's something that we are not in the rush to do. We would like to do it. It helps our operating plan execution, but none of those are urgent to us. The important thing, I think, is that the fixed portion of it, which is the -- what addresses the incremental financing, is hard -- is locked in and is being executed.

The second piece, I think, has to do with -- and I think that answers 2 of your questions. One of the -- the third one, if I recall correctly, is short-term debt. So what you see there is our short-term obligations, right, which is short-term debt, but it's also the amortizing portion of our longer-term debt. A large portion of our debt is ECA financing. An ECA financing, by its nature, has strong amortization. So I think you will continue to see over time that, like most airlines that depend on ECA financing because ECA financing is very cost effective, we will continue to have a substantive portion of our debt in short term at the close of every year.

Obviously, we have initiatives in place to refinance some of that debt. So as I think you imply, we do intend to amortize that down. We don't intend to amortize that full quantum down, so we do have some refinancing needs. We have several transactions identified and plan to do that. And the majority of them are actually to be executed in the bank and loan market and not in the public markets. We are looking at the -- at the current dislocation of the market carefully.

But the good news is we had -- and this is why it was important for us to carry out the financing transactions that we carried out in the third quarter. The $375 million or the $250 million plus the $125 million that close later that we did and to carry out the sale-leaseback transaction is because we believe, as we've stated before, that the airlines need to be operated with more liquidity. We're currently sitting on a substantial liquidity cushion. And so, again, while we're being cautious and we're monitoring this, we're not in desperate need or in a rush to run into today's market, and we'll wait for things to settle down before we start executing on this year's transactions. We're still very early in the year.

I think your other question was why the incremental cash at the end of the year doesn't reflect all of the incremental cash we raised. And I think that's 2 things. One is if you look at our payables, we did receive a lot of support from our suppliers and from our operating partners throughout the year in our financing. Some of those -- many of those are smaller suppliers, whose cash flow we were putting under stress and who were supporting us. So we did a pretty extensive exercise in the last week, 1.5 weeks of the year to get more current and to shorten payment terms with several suppliers. And you could see that in our payables.

And the other is, as we've already alluded to, the restructuring charges that we took for last year, the vast majority of those have to do with adjustments to D&A that are basically mark-to-markets of aircraft, and those are noncash. But there is about $80 million of fees and expenses related to all of the transactions that we did last year that we also are current on. So that was not insubstantial outflow of cash towards the end of the year.

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Operator [17]

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Our next question is from the line of Miguel Ospina with Compass Group.

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Miguel Ospina, Compass Group S.A. Comisionista De Bolsa - Senior Investment Analyst [18]

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I have 3 questions. The first one is just to know if I hear it correctly. So your current levels of cash are at $650 million after the sale leaseback?

The second question is cash flow from operations was negative during the fourth quarter versus a positive number in 2018. So my question is what happened there with cash flow from operations?

And my third question has to do with your numbers throughout the year, as I think that the results for 2019 were extremely difficult to read. It was a year full of one-offs, one-offs in 1Q, 2Q, 3Q, 4Q. So my question is will 2020 be the same? Or will management be committed to show cleaner numbers in 2020?

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Adrian Neuhauser, Avianca Holdings S.A. - CFO [19]

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Anko, can I -- do you want me to take this?

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Anko Van Der Werff, Avianca Holdings S.A. - Executive President & CEO [20]

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Go. Go on. Yes, go on.

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Adrian Neuhauser, Avianca Holdings S.A. - CFO [21]

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Sure. So the last one is easy, guys. We're committing to some cleaner numbers. It doesn't mean we won't have one-offs. But we said this jokingly in the last earnings call, and -- but we'll repeat it again. It's very difficult for the market to see the underlying performance. And if we continue to basically ask you to adjust numbers and to ask you to adjust them in the quantum that we're doing, it will be very difficult for you to see the change. So no, we fully expect to shift.

Now like every other company have one-offs, but we certainly don't expect them to be in the quantum that we're seeing or to substantially move the guidance that we were hoping to give today, but that we will eventually give, we expect anyone else to be within the range of that guidance.

Your first question was cash position, and that's right. We're slightly under $650 million today. But your comment as to -- after the closing of the sale leaseback, that's not quite right. We closed, I think, slightly under half of that transaction. We're still in the process of closing the rest. Now we do have negative cash flow in the first quarter because we do have debt amortization obligations. So money coming in, money coming out, we expect to be roughly around that same number by the end of the quarter. But that number does not include today all of the sale-leaseback transaction.

And then your third one was cash flow from operations in the fourth quarter. Cash flow from operations in the fourth quarter is impacted really by a couple of things, right? One is if you look at fourth quarter, if you look at change in working capital of fourth quarter '18 versus change in working capital of fourth quarter '19, you'll see that we -- again, this effort that we alluded to, to be more -- a better partner with our suppliers who have provided support. So working capital is not a substantial portion of that.

And then the other part is, I think, these -- the fee that we alluded to. We also had some timing issues related to maintenance events and things like that, that were different fourth quarter of '19, fourth quarter of '18. And if you'd like, we can bridge the 2 of them for you offline. But we believe that fourth quarter underlying numbers '19 were slightly better than fourth quarter underlying numbers '18. We show something like slightly over 20 bp EBIT margin improvement, which we think is real.

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Operator [22]

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

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Rogério Araújo, UBS Investment Bank, Research Division - Director and Equity Research Analyst [23]

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Only one question on my side regarding yields. So we saw Avianca reducing the capacity by about 7% year-over-year, load factor also decreasing almost 2 percentage points. Nevertheless, we haven't seen a yield recovery so far. So if you could talk a little bit about how the competition environment is in Colombia right now, if there is any oversupply from other players, price war, anything affecting the market overall. And also, if you could talk a little bit about the routes that Avianca has been cutting, if they were unprofitable routes or if the profitability was close to average. So why we don't see an impact in the yields with this capacity cut plan?

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Anko Van Der Werff, Avianca Holdings S.A. - Executive President & CEO [24]

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Thanks, Rogério. Yes, listen, a few elements there, right? Let's tackle them one by one. First of all, the capacity and where we see strength and weaknesses in both capacity and the yield environment. I should do think that you see RASK and yields bottoming out and turning. And it's definitely something that we have seen in the later stages of that 4Q and going into 2020, right? So this is, of course, 2019 call. But as we said as well, we were guiding in the first quarter to at least the margin expansion versus last year and higher than the 2% that we had in the plan. And therefore, that's also very much driven by yields.

So what we took out very clearly has been stuff that didn't work for us. I think if you look at the Peruvian market, there -- it was important to know that we were one of the smaller players, and you can hang on to that share or let go of it. And that's, of course, what we've done. Unprofitable routes that we've therefore given up, and we've taken it out pretty much completely to the extent that we're now foreseeing profitability in Peru.

The other thing is, outside of Bogotá, not touching a hub, right? So not touching any of the hubs in the network to 2 points that are -- that are another hub but very important cities, we've also taken that out because also that not only is sometimes loss-making but definitely not efficient. So there, you wouldn't necessarily see the same impact. There you would see that through costs and through efficiencies, through standardization simplification, you can do so much more in terms of the efficiency of a hub. So there's 2 buckets, right, in answer to your questions on yields.

Well, where do we see still capacity issues? We still think that the Colombian market as a whole has its fair share of capacity. I really do think that these markets are still not big enough and not mature enough to take on the capacity and some of the capacity growth that all of us want to put into those markets. What we have to understand is, of course, that the overall South American market, Central South American Latin market, is quite substantial, but it's also still very fragmented. And that is, I think, something that all of us will have to deal with.

If you look at it, then Europe to South America -- also under pressure because there's a lot of competition in that market already from Iberia, Air Europa, Plus Ultra coming in, starting new routes or adding frequencies. That is also a market that, I think, will probably be a bit weaker going forward.

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Operator [25]

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Our next question is from the line of Camilo Roldan with Davivienda Corredores.

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Camilo Andres Roldan Romero, Corredores Davivienda S.A., Research Division - Equity Analyst [26]

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I'm Camilo. I have 2 short questions. The first one is to confirm what is the amount that you're expecting to get for the sale of the 31 airplanes? And the second one is that in the guidance that you gave us about the transporter -- transported passengers and other operational figures also include the sale of the airplanes?

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Adrian Neuhauser, Avianca Holdings S.A. - CFO [27]

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Yes. So the sale of aircraft is not operational. And it won't impact either operational or nonoperational guidance for this year because those figures were included in December, right? So we took the charges. All of these aircraft were being -- not all of them, but as a bulk, the aircraft were being carried on the books for more than the value that we were able to realize. So they resulted in charges, and those charges are a large portion of the losses that we show in the fourth quarter. So it won't impact -- they should not impact the P&L this year.

And the cash flows, as we said, in the fourth quarter, from the 319s, we realized $100 million roughly net -- sorry, from the 318s and 320s, roughly $100 million net, slightly, slightly below that. We realized slightly below $20 million this quarter from the closing of the Embraer's debt, again, of the debt that was attached to those aircraft.

And we believe that the remaining aircraft -- we're realizing slightly over $200 million net from the sale leasebacks, the 15 aircraft sale leaseback. And then the aircraft that we mentioned are held for sale but have not yet been put on the market, which are the 2 330s, the 1 -- the 2 330 passengers, the 1 330 freighter, 1 330 -- 1 320 passenger and 2 319s. Those we expect to roughly realize the debt that's held against them, so we don't expect substantial cash flow from them.

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Operator [28]

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Our next question is from the line of Manuela Echavarría with Credicorp.

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Manuela Echavarría Cuartas;Credicorp Capital;Analyst, [29]

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Just one question. Can you provide like kind of an update on the 3-way JV? If I'm not mistaken, you recently signed a codeshare with TAP and also with Gol. So I don't know if you have kind of update there?

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Anko Van Der Werff, Avianca Holdings S.A. - Executive President & CEO [30]

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Yes, sure. Thank you. So 2 different groups, right? We have indeed been very active at the partner level. You've seen us signing codeshares and expand some of the codeshare agreements that we already had with the likes of Azul, Gol, TAP, all as part of the effort to, yes, to expand, in a way, our virtual networks, right, in other places and to work better with our partners and to also, in some cases, increase the connectivity, again, of the Bogotá hub primarily, but of course also all the other hubs that we're having, such as El Salvador.

The other thing is JBA, I think what you asked as well. JBA, very, very straightforward, long term, absolutely no change to what we intend to achieve. We have always been very clear, Copa, United and us, that there's a lot of consumer benefits in that. What is -- what we have said that before you go to a regulator, you want to have stability, right? You want to have stable network and certainly, in the case of Avianca, that was not the case, and that is why there was a bit of delay. So first, what we have to do is make sure, okay, here's our network plans. This is really the network vision, is what you want to be able to show a regulator as well.

From a baseline, here is the consumer benefits that you're going to drive. But of course, you don't have a stable baseline and you're unable to show that. So that's what we've been working on. That's where, in the coming months, we'll finalize everything and put it forward to the regulators. Because, again, long term, there's absolutely no change. We see clear benefits for the customers and, of course, also for ourselves. And that's why we want to do that.

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Operator [31]

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We've reached the end of our question-and-answer session. I'll turn the floor back to Luca Pfeifer for closing remarks.

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Luca Pfeifer, Avianca Holdings S.A. - IR Officer [32]

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Thank you very much. Once again, thank you to everyone for your continued interest in Avianca and for joining us today. We appreciate your questions, and we look forward to talking with you again in the months ahead. Obviously, this concludes our conference call for today. But myself and my team, we are available for any follow-up questions you may have. Thank you very much, and goodbye for now.

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Operator [33]

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Thank you. You may disconnect your lines at this time. Thank you for your participation.