Copa Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 11, 2023

There are 13 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Copa Holdings First Quarter Earnings Call. During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session. As a reminder, this call is being webcast and recorded on May 11, 2023.

Operator

Now I will turn the conference call over to Daniel Tapia, Director of Investor Relations. Sir, you may now begin.

Speaker 1

Thank you, Felicia, and welcome everyone to our Q1 earnings call. Joining us today are Pedro Hellground, CEO of Copa Holdings and Jose Montero, our CFO. First, Pedro will start by going over our Q1 highlights, followed by Jose, who will discuss our financial results. A reconciliation of the non IFRS to IFRS financial measures can be found in our earnings release, which has been posted on the company's website, copaair.com. Our discussion today will also contain forward looking statements Not limited to historical facts that reflect the company's current beliefs, expectations and or intentions regarding future events and Results.

Speaker 1

These forward looking statements involve risks and uncertainties that could cause actual results to differ materially and are based on assumptions subject to change. Many of these are discussed in our annual report filed with the SEC. Now, I'd like to turn the call over to our CEO, Mr. Pedro Hedron.

Speaker 2

Thank you, Daniel. Good morning to all and thanks for participating in our Q1 earnings call. Before we begin, I would like to extend my sincere gratitude to all our co workers for their commitment to the company. Their continuous efforts and dedication have kept Copa at the forefront of Latin American Aviation. To them, as always, My highest regards and admiration.

Speaker 2

Today, we're pleased to report strong results for the Q1 and a solid outlook for the year. Despite the continued high fuel prices in the quarter, we were able to deliver an operating margin of 22.3%. These results were mainly driven by a robust demand environment in the region, which led to an improved load factor as well as an increase in passenger yields during the quarter. Among the main highlights for the quarter, Passenger traffic grew 7.1% compared to the same period in 2019, outpacing our capacity growth of 2.8%. This resulted in an 86.8% load factor, A 3.5 percentage point increase compared to Q1 2019.

Speaker 2

Passenger yields came in at $0.146 or 20% higher than the Q1 of 2019, Wellcargo revenue was 52% higher, resulting in unit revenues or RASM of $0.131 A 25.5 percent increase compared to the Q1 of 2019. On the cost side, Our unit cost excluding fuel came in at $0.062 or 2.1% higher compared to Q1 2019. As a result, our operating margin came in at 22.3%, 5 0.5 percentage points higher than in the Q1 of 2019. On the operational front, Copa Airlines delivered an on time performance of 92.2% and a completion factor of 99.9%, Once again, amongst the very best in the world. I would like to take this opportunity to express my recognition For more than 7,000 co workers who day in and day out deliver a world class travel experience to our customers, their contributions are key to our success.

Speaker 2

Turning now to our fleet, we received 27 37 MAX 9 aircraft during the quarter And we expect to receive 10 more MAX 9s during the remainder of the year to end 2023 with a total fleet of 109 aircraft. With regards to our network, as we mentioned in our last call, we plan to start new service to the cities of Manta in Ecuador and Baltimore and Austin in the U. S. Starting this summer. With these additions, We will serve 80 destinations in 32 countries in North, Central, South America and the Caribbean as we continue strengthening And solidifying our position as the most complete and convenient hub in Latin America.

Speaker 2

Finally, With regards to Wingo, Wingo continues its regional expansion with the announcement of 3 new domestic Colombia routes From Bogota to Barranquilla, Pereira and Bucaramanga and 1 international seasonal service from Cali in Colombia to Aluba. With these additions, Wingo will operate 34 routes with service to 21 cities in 10 countries. Now Turning to our expectations for 2023. As you saw in our earnings release, we increased our operating margin guidance to a range of 22% to 24%, mainly driven by the current solid demand environment in the region As well as a lower fuel curve for the remainder of the year. As always, Jose will provide more detail regarding the full year's outlook.

Speaker 2

To summarize, we're off to a very good start in 2023 and expect to keep seeing a healthy demand environment throughout the year. We continue growing and strengthening our network, the most complete and convenient hub for intra Latin America travel. And as always, our team continues to deliver world leading operational results, while maintaining our cost low. Lastly, we're as confident as ever in our business model. We continue to deliver solid margins and competitive unit costs, We're offering a great product to our passengers, making us the best positioned airline in our region to consistently deliver industry leading results.

Speaker 2

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

Speaker 3

Thank you, Pedro. Good morning, everyone. Thanks for being with us today. I'd like to join Pedro in acknowledging our great team for all their efforts to deliver a world class service to our passengers. I will start by going over our Q1 results.

Speaker 3

We reported a net profit for the quarter of 100 and $21,500,000 or $3.07 per share. Excluding special items, net profit came in at $157,800,000 or $3.99 per share. 1st quarter special items are comprised of an unrealized mark to market loss $37,900,000 related to an appreciation in the value of the company's convertible notes and a $1,700,000 unrealized mark to market gain related to changes in the value of financial investments. We reported a quarterly operating profit of $193,200,000 and an operating margin of 22.3%. Capacity came in at 6 point 6,000,000,000 available seat miles or approximately 3% higher than in Q1 2019.

Speaker 3

Load factor came in at 86 point 8 percent for the quarter, a 3.5 percentage point increase compared to the same period in 2019, Our passing year yields increased 20 percent to $0.146 As a result, unit revenues came in at $0.131 or 25.5 percent higher than in the Q1 of 2019. Driven by higher jet fuel prices, Unit costs or CASM increased 17.2% versus Q1 2019 to $0.102 Our CASM excluding fuel came in at $0.062 a 2.1% increase versus Q1 2019, mainly driven by additional engine maintenance costs, changes in supplemental rent provisions related to aircraft utilization, as well as additional lease engine costs, plus an increase in our sales and distribution costs as a function of higher sales during the period. I'm going to spend some time now discussing our balance sheet and liquidity. As of the end of Q1, we had assets of close to $4,900,000,000 And in terms of cash, short and long term investments, we ended the quarter with $1,200,000,000 which represents 36% of our last 12 months' revenues. To our debt, we ended the quarter with $1,700,000,000 in debt and lease liabilities And achieved a net debt to EBITDA ratio of 0.6 times.

Speaker 3

80%

Operator

of our aircraft

Speaker 3

debt is fixed And I'm happy to report that our blended cost of aircraft debt for the quarter came in at an annualized rate of 3%. Turning now to our fleet during the Q1 we received 2 Boeing 737MAX9s to end the quarter with a total of 99 aircraft compared to 102 aircraft in our fleet at the end of 2019. With these additions, our total fleet is now comprised of 68 730seven-800s, 22 737MAX9s and 9730seven-seven 100s. These figures include 1730seven-eight 100 freighter And the 9730seven-eight 100 is operated by Wingo. 2 thirds of our fleet continues to be comprised of owned aircraft and 1 third of our aircraft are on their operating leases.

Speaker 3

During the remainder of 2023, we expect to receive 10 additional aircraft, all Boeing 737 MAX 9s To end the year with a total fleet of 109 aircraft. Finally, I'm pleased to inform you that this past month of March, Our Board of Directors approved a quarterly dividend of $0.82 per share subject to Board ratification each quarter, which reinstates our dividend payout of 40% of prior year's adjusted net income. We made our first quarterly payment during the month of April And the second payment would be on June 15 to all shareholders of record as of May 31. As to our outlook, Based on the strength of the current demand environment, we can provide the following guidance for full year 2023. We expect to increase our capacity in ASMs We now expect an operating margin within the range of 22% to 24%.

Speaker 3

We're basing our outlook on the following assumptions load factor of approximately 85%, unit revenues within the range of $0.125 CASM ex fuel to be in the range of $0.061 And finally, we're expecting an all in fuel price of $2.85 per gallon. Thank you. And with that, we'll open the call to some questions.

Operator

Thank you. We will only take The first question comes from the line of Stephen Trent from Citi. Stephen, please go ahead.

Speaker 4

Good morning, gentlemen, and thank you very much for taking my questions. I was wondering kind of on a high level basis, if you could discuss the opportunities related to the renewed strategic alliance with United Airlines from August 2021 and what you might be seeing in terms of the potential for a joint business agreement, Maybe we're visiting that down the line. Thank you very much.

Speaker 2

Yes. Hi, Steven. It's Pedro.

Speaker 5

Hey, Pedro.

Speaker 2

Yes. We have a very strong alliance with United that goes all the way back to the Continental days. And on top of that, we're of course part of Star Alliance. So we feel that with our strong united relationship plus Star Alliance, We cover what's of most benefit to Copa in terms of where we fly, the regions where we fly, where we're active And the earnings that we should be in an alliance with. We also have that A letter of intent or whatever it's called with between Avianca, United and Copa for a JBA joint business agreement.

Speaker 2

And I think that has not been implemented. The pandemic was in between. And honestly, I don't really know if that's going to be implemented or it will just be allowed to expire. I think it probably has over a year For that decision to be made. But again, what I'm trying to say is that we have the alliances we need And that adds the most value to Copa.

Speaker 4

Super, Pedro. I really appreciate that. And just my one follow-up. I believe you talked in the past about the LEAP engines driving kind of a one time relatively smallish CASM ex headwind into this year. And So any high level view on whether that's going to ease as we move through 2024?

Speaker 2

Yes, I'll let Jose answer. Yes, Stephen,

Speaker 3

let me just say that Yes, there's some, I would say short term headwinds related to the LEAP engine. Most of the costs that we've seen So far this year are associated to short shop visits that some of the engines require to as Part of campaigns that are being performed in the worldwide fleet of the LEAP. We're seeing an improvement In the performance of the engines and we are relatively advanced in the majority of these campaigns. And so going forward in the rest of 2023, we expect to have a lesser number of engines going Into the shop and or with some of the fixes that are required. And so that actually flows into our $0.061 CASM guidance that we have for the full year Vis a vis the CASM ex guidance that we had issued back in February.

Speaker 3

Super helpful, gentlemen. Thank you for

Speaker 4

the time and looking forward to seeing you on Tuesday.

Speaker 2

Thank you, Steve. Same here.

Operator

One moment for the next question. The next question comes from the line of Savi Syth of Raymond James. Savi, please go ahead. Thank you. Good morning, everyone.

Operator

I was curious, you're usually fairly conservative team in I give you confidence this early on to kind of take those numbers up?

Speaker 3

Yes, Savi. Hello. I'll start and maybe Pedro, you can jump in To complement, I would say that the first thing is that Q1 certainly had a very, very robust Demand environment, so I think that's a portion of the increase that we had made to our unit revenue guidance. And then secondly, I would say that from our visibility that what we have for the coming months, specifically a second quarter, The demand environment continues to be relatively robust. So that's also embedded in there.

Speaker 3

And then we are cognizant that our visibility is limited for the remainder of the year. So I think that that's There's some seasonality as well that we put into the guidance. And of course, we are cognizant as well that there's a lot of capacity coming Into the market, there's a lot of fuel is also an item that we are paying close attention to and the movement in fuel. So So we're I think we can say that we're confident in the 12.5%, but it's mostly related, I would say,

Speaker 2

And the only thing I would add, Savi, is that Our guidance, even though it has been improved as you all mentioned, still puts us at a lower RASM for the second half of twenty twenty three compared to the second half of twenty twenty two. And that's because of The decreased fuel curve and the additional capacity coming into our market. So we're still projecting lower RASM in the second half of the year.

Operator

That's helpful. And along those lines, my second question, I wonder if you could talk a little bit about what you're seeing on the business demand standpoint. It seemed like it was Slow progress over the last few quarters, have you seen any improvement there?

Speaker 2

There's still some improvement, but Things have changed at least in our part of the world since the pandemic. So leisure is our strongest segment now. It's not as much as half, but it's in the 40% of our split between leisure, VFR and Business and Business has come up somewhat. It's like in the mid-20s, Maybe a little bit less than that percent in terms of that same split, but slight improvement in the last few quarters, Nothing very significant.

Operator

Perfect. Thank you.

Speaker 3

Thank you, Savi.

Operator

One moment for our next question. The next question

Speaker 6

Good morning, Pedro, Jose, Daniel. Thanks for taking the question and congrats on the pretty strong results. First question is just a follow-up on the assumptions behind the guidance. I think it's clear on the CASM front, but just wondering in terms of the capacity addition, there was a small reduction. Just wondering if it's related to Any potential bottlenecks on the supply side of the industry?

Speaker 6

And on the rest guidance, thinking that Probably it implies a stronger yields for the year despite of lower fuel cost as well. So if you could please just further explain How you're seeing demand environment going forward?

Speaker 2

Yes, I'll start and then I'll let Jose add. So in terms of capacity, well, Copa itself is receiving 12 aircraft in the year. So that's quite a bit some capacity. And then our peers in Latin America are getting back to pre pandemic levels, Which was not the case in 2022, but will be the case from now on the rest of 2023. So all of that together, plus there are other earnings, especially UOCCs, which are growing faster than pre pandemic.

Speaker 2

So when we add all of that up, it's a considerable number of additional seats in our region. Demand is there, of course. So we're confident on the demand and we're confident that there's enough demand, but More capacity plus lower fuel usually tends to result in lower unit revenues.

Speaker 3

Yes, Guillermo, in terms of the capacity movement that we made In terms of our full year guidance, it is, yes, related to the latest forecast that we have in terms of our craft deliveries So that's what we have in terms of our best knowledge as of now in terms of new aircraft deliveries.

Speaker 6

Super clear. Thank you. And the second question is in terms of the capital allocation. And naturally, the dividend is already out. You have the buyback open as well.

Speaker 6

But thinking that leverage remains below onetime net debt to EBITDA, if you see room for maybe an extraordinary payment Or a more aggressive buyback.

Speaker 3

Yes. All right, Guillermo, we I have to say that we reinstituted our dividend. The Board approved that back in March and it's 40% of our Prior year's adjusted net income and so we're I think happy I think with that level. I would say that our buyback program as you We saw continue to be active during this year, during the 1st part of the year. And I think that there's a couple of Important points to make.

Speaker 3

Number 1 is that we have a sizable number of investments coming in related to aircraft for growth of our business. So I think that part of this capital that we have is geared towards growth of Copa itself. And number 2, we have to convert and we also have to want to have a lot of flexibility in terms of the Management of that liability.

Speaker 6

Super clear. Thank you. Have a great day.

Speaker 2

Thank you. Thank you. You too.

Operator

One moment for our next question. The next question comes from the line of Michael Linenberg from Deutsche Bank. Michael, please

Speaker 5

go ahead. Hey, good morning, everyone, and that was great forecast. Couple here. 1, the move to add additional domestic service in Colombia by Wingo, Was that in response to the suspension of Veeva and Ultra? Is it a tactical move?

Speaker 5

Is it A harbinger maybe getting bigger in the domestic Colombia and is there an opportunity for you to maybe get some of the slots That will potentially be released as a result of consolidation and rationalization in the Colombian market. That's my first question.

Speaker 2

Okay. So a few things there, Michael. One is that Wingo is not really a large player In domestic Colombia, wind was 9 planes, as we know, it's 9730seven-eight 100. And this capacity shift has to do with something that's been developing Over the last number of months, which is a more strength in the domestic market than in the Some of the international routes that have seen a lot more capacity. So it's tactical, it's limited.

Speaker 2

Yes, the shutdown of certain airlines It has a positive effect, but actually benefits much more the other airlines, the other incumbents In Colombia, Wingo again is not significant and it never really competed that much head on with the airlines that are No longer flying, so not a huge impact. But there is a little bit better strength in the domestic and that's why They reduced what Wingo has done is reduced frequencies in some of the international markets that we're not doing as well And redeploy them in the domestic market as that is doing better. So again, tactical.

Speaker 5

Anything on the Bogota slots that Potentially come available, are you in line to try to grab some of those for your use?

Speaker 2

Right. So although there are no Plans to grow the Wingo fleet in an aggressive way. We tend to be disciplined and Wingo will continue taking advantage of opportunities and not just taking a bunch of aircraft. So Wingo will remain disciplined and But the Bogota slots are very important because it was very difficult for Wingo. It is very difficult for Wingo To publish an advanced schedule and fly at the right times, at the peak times when most passengers want to fly because Up to now, the slots in Bogota have been dominated by a single carrier.

Speaker 2

And so hopefully, This is going to change and make Bogota, which is like the only or one of the very few slot restricted airports In our continent, it will make it more competitive and it will allow WingOne and others to offer service at the time passengers Wanna fly. So we see that as a positive development.

Speaker 5

Okay, great. And then this is just another sort of network Question, Pedro. One of the things that we saw coming out of COVID is we saw a lot of the big global hubs Initially only benefit from the recovery of local traffic. And I think as things have started to turn on, we're seeing a lot more What we call 6 Freedom Traffic, 3rd and 4th Freedom Connections, which is something that you specialize in. And so when you look at The commentary out of say a Turkish or an Emirates or a Cathay Pacific, you're really starting to see that benefit.

Speaker 5

And I think When I look at Copa and I look at capacity coming online by some of your competitors where I think you really outshine the competition It is all the connections that you fly in city pairs that nobody else serves. And I suspect that maybe that wasn't seeing as much service In the earlier part of the recovery period and that's starting to turn on now and those are markets that are uniquely served by Copa. Is that right? Is that something a trend that you've been seeing in your markets or maybe your connecting markets turned on from day 1?

Speaker 2

Well, we've seen strength throughout our markets and throughout our network, and we're staying True to our vision and to our business model, so coming out of the pandemic, We went back to doing what we've always done in a very focused and disciplined way and that demand has kind of been there From the beginning, I would say, but it's obviously stronger now and it continues to grow. It's holding up. There's more capacity from other airlines and from ourselves coming in, but the whole market has improved. And yes, I think you're right, We have something unique about our network and we hope to continue developing it.

Speaker 5

Okay. Well, great. Great results and thanks for answering my questions.

Speaker 2

Thank you.

Operator

One moment for the next question. The next question comes from the line of Bruno Amorim from GS. Bruno, please go ahead.

Speaker 7

Yes. Thank you for taking my question. So I'd like to hear from you, if possible, what's your vision For the next few years in terms of competitive dynamics and the expected profitability for the business, of course, Adjusting for eventual volatility in macro conditions, which might happen. My point here being that If you look in the 2010 to 2014 cycle, margins were around 20%, I'm talking about EBIT margins. Then Between 2015 2019, margins hovering around 15%.

Speaker 7

So if you were to guess for the next few years, are we More in the type of market that we saw between 2016 2019 or is it possible to sustain margins around 20% even though you're not growing as much Welcome back to that cycle of 20 10 to 2014 when the region was growing, but eventually after the pandemic, you might see structurally less competition. Just trying to figure out what will be the new normal going forward and it would be great to hear your thoughts around that. Thank you.

Speaker 2

Okay. So we have provided guidance for 2023 Only not from not for the years after that. And I would like not to speculate much About the future, but I should say that we spend a lot of time working on improving every aspect of the company, What we've always done and make Copa more competitive as we go and as we grow. We see right now, right now what we can see now is a robust demand environment. We see a good future for our business model focused on one half of the Americas in Panama And we see many opportunities to increase the connectivity and add new cities, and we will continue working So that's what we do, that's what we will continue to do and it seems like the environment For such an airline to thrive in our part of the world is there and it might be getting better.

Speaker 2

So that's what we're working on. There's always competition, of course. Hopefully, there's room for the ones that have also A business model that makes sense for them and that's realistic with the size of the market. So as long as it's there's that balance, I think we'll be fine. And in any case, we hope to always be in a position to do better than the others.

Speaker 2

So That's our focus. But beyond 2023, I think we have to wait a few more earnings calls.

Speaker 7

That's great, Peter. Thank you. That's great perspective. If I may just a very quick follow-up After the capacity you expect to come back during the year, as you mentioned, will you be in the same position in terms of Overlaps in competition overall visavis the pre pandemic scenario, more or less competition, can you comment on The competitive landscape after this capacity that you expect to come back is in place. Well, I think

Speaker 2

I mean, the competition is pretty public, so we probably kind of have the same information. But competition has Change is not I would say it's not less than before. If anything, it's more dynamic, maybe more aggressive, But it's changed in the sense that it's gone more towards the low cost side of the spectrum. And in that sense, We are like one of the few remaining full service airlines in our part of the world And there's some there's a space for that, but there's a lot of competition and we compete with all And we try to be as aggressive as anyone, especially since we've talked about a larger percent of passengers now are leisure

Operator

Please hold for your next question. The next Question comes from the line of Helane Becker of Cowen. Helane, please go ahead.

Speaker 8

Thanks so much, operator. Hi, guys. Thank you for the time. So you guys are coming up to New York next month and holding your Investor Day. When we think about things you can say, Have you thought about the focus of that and what you can update us on?

Speaker 8

I don't want to run ahead of it, but I'm kind of wondering what to look forward to.

Speaker 2

Well, hopefully a good meal and A good Q and A session. But as you know, Helane, our story doesn't change much From year to year, we always stick to pretty much the same business model, which as I was mentioning before, we try to always improve And make better. And hopefully, we'll talk about that, about what are we working on, what are we focusing on, what we're making better, what's working, What might need changes, but never big surprises. We tend to have like Our way of doing things and as long as there doesn't need to be changed, we just look to improve it. So I would say expect More of the same and maybe, maybe well, Jose, go ahead.

Speaker 3

I'll just add, well, first of all, for certain things, Elaine, We try to take one day at a time. So we're preparing earnestly for the earnings call and then maybe next week we'll start working on the Details of the Investor Day. But I would say a couple of things to add to what Pedro mentioned. Number 1 is that our last Investor Day was Here in Panama back at the end of 2019 before the pandemic, so we are cognizant that it's important to For you and to get face time with us and I think part of what we have in store is also getting face time with Members of management that are beyond us too. So I think that that's also an important part of it and just simply Provide an update on some of the initiatives that we had discussed back 3 years ago.

Speaker 3

So it's I think that's kind of what we have in mind.

Speaker 8

That's kind of a lot. And then my follow-up question is something I think Jose that you talked about in terms of capital allocation with respect to Sure. We purchased in the convert, which I think is callable. Did I interpret your answer correctly that Either one of those is up is fair game that you would buy back to convert, If it made sense? Yes.

Speaker 3

I don't want to speculate. I don't want to get into necessarily details of potential Avenues that we might pursue, but I would say that we at this stage want to maintain flexibility in terms of the options that we have. So I think that the balance sheet is very, very strong and we want to keep alternatives open to minimize the cost For us in terms of the settlement of the convert. So and yes, we're also cognizant that the convert has a call Option in there and we all alternatives are on the table right now related to that.

Speaker 8

Thank you. Thanks, guys.

Operator

One moment for the next call Our next question? The next question comes from the line of Daniel McKenzie of Seaport Global, Daniel, please go ahead.

Speaker 9

Hey, good morning guys. Congratulations on the quarter and the outlook here. Just have a couple of questions. The first really ties to revenue from Premium Seating. And I'm really just trying to get a basic understanding on this part of the story.

Speaker 9

So I guess first, what percent of the revenue is it today versus what it was in 2019? And then just related to that, how quickly is that growing?

Speaker 2

Yes. Okay. So let me start and

Speaker 3

then I'll

Speaker 2

let Jose follow-up. So, Dan, we don't share that specific information, but what I can say is that premium demand And premium yields are above pre pandemic levels. So load factors are better, yields are better And premium seating profitability is better than pre pandemic.

Speaker 3

Yes, well, and also our paid load factor So I think that's another data point that's important.

Speaker 9

Okay. And I guess a second question here is just a question on the new distribution strategy that you've talked about in the past. What percent of the revenue is booked on Copa's website today versus the GDSs? And how does that compare to 20 The GDSs and how does that compare to 2019? And then to what extent is that helping you to capture some Additional revenue saved from upsell opportunities are bundling in.

Speaker 9

And then tied to that, how material are the cost savings that you're seeing from this new strategy?

Speaker 2

Okay. I'll start and if I leave anything out. So big picture, pre pandemic, We could say that a third of our distribution was direct and 2 thirds We're indirect, so agencies and the like. And today, we're very close So flipping those numbers, we're 2 thirds will be direct, including NDC connections And 1 third is going to be a traditional travel agency GBS bookings. So we're about to flip the numbers, the ratios, as I just mentioned.

Speaker 2

And that, of course, comes with considerable Savings, including that we're charging a surcharge for a traditional GDS bookings, Which make up for any cost difference. So, I don't know if we are Sharing yet any cost saving numbers, but When we add the revenue impact, so the revenue It's positive.

Speaker 3

I mean, I think that so far,

Speaker 10

I mean, it's first of

Speaker 3

all, we have to say that this started in Q3 3 of last year. So it is still an ongoing process that we have, but it is From, let's say, ROI perspective or a cash perspective performing, I think, as Maybe a little bit better. But as Pedro mentioned, there's a portion of the benefit here that shows a factor in revenue because of the fact that we have A fee that we charge for sales that are not performed either on MDC channels or on our own direct channels. Now going forward, our expectation is that the actual costs, pure costs of distribution Should come down in the manner that our direct channel sales continue growing. So We have an expectation that will come over the next several quarters.

Speaker 3

And that benefit actually, that channel shift benefit, Dan, is included in the guidance and $6.01 guidance at least for the end of this year. But again, this is There's a kind of a change of model and so it will be with us for many years to come.

Speaker 2

And as important is the fact that now we have much better control of our distribution and that's going to allow us to do more things in the future that would lower Costs and improved revenues, of course.

Speaker 9

Yes, that's perfect. Thanks so much you guys.

Speaker 2

Yvan? Thank you.

Operator

One moment for your next question. The next question comes from the line of Alberto Villarreal of UBS. Alberto, please go ahead.

Speaker 11

Hi, Pedro, Jose. Thank you for taking my questions and well done for the results. Sorry for the repetitive year, but it was amazing the guidance that you guys just provided to us for the year. And I'm wondering here to find What was the difference between the guidance that you just provided in February, mid February, from 2 months and a half later or 2 months later, the guidance that you guys are providing today, so we have Talked about the demand already, that's stronger. You said that also maybe higher exposure to the high income class, which is Business travelers, is there anything else like some exposure to regions, North America, South America, some different that or something different from the people Style of traveling, if you could give some information on that, it would help a lot.

Speaker 2

So in a very simple way, and I'll let Jose if he needs to add anything or be more specific, in a very simple way, What Jose mentioned before, we have now visibility on the first half of the year and a lower fuel curve. So those two things are the main drivers to the improved operating margin guidance.

Speaker 3

Yes, I would say that in terms of regional performance, I would say that most of our regions are performing very well ahead of what we had Before and as Pedro mentioned, first half is performing well. And when you look at the operating margin guidance, we I forget about fuel as well? When we provide our guidance back in February, fuel was a higher level than where

Speaker 11

it is today as well. We can say also that competition is less curious than it was in the past because when we see Fuel drop in the past, we see yields come down. And according to the guidance that you guys provide, yields could be Flat for the year, even if you're going double digits down?

Speaker 2

No, not necessarily. As I mentioned before, Our RASM guidance implies So RASM, we delivered for the second half of twenty twenty two, the year before. So we are factoring in A lower than 2022 RASM and that's the lower fuel curve and capacity from competitors. But again, having the better visibility for the first half of the year allowed us to adjust RASM upwards for the full year.

Speaker 11

Fantastic, fantastic. And my last one here on the working capital, it came a little bit Above what we have estimated for the quarter, just wondering whether it's something not recurring on this quarter on the working capital matters. Thank you again for taking my question and congrats on the results.

Speaker 3

I would say, Alberto, that we had From an ATO perspective, I think even though ATO is actually down for the quarter, Sales are still ahead. I think there's some items there related to some refunds of tickets And expired coupons, etcetera, but it's I think there's also seasonality in there as well. So that's I think the main drivers there.

Speaker 2

Thank you. Thank you.

Operator

One moment for the next question. The next question comes from the line of Djuwa Andrade of Bank of America, Joao, please go ahead.

Speaker 2

Yes. Hey, actually, this is Rogerio Araujo.

Speaker 11

Thanks a lot for the opportunity, Pedro Jose and Daniel. I had one question. Last time we saw margins close to where Copa is delivering was prior to 2015. If I'm not mistaken, Venezuela was doing great at the time, was actually pushing that margin Upward significantly. On an apples to apples basis, is there Our reason to believe that Copa is actually much more profitable now than at that time.

Speaker 11

Let me put in other words this question. Any reason to believe that Copa's structural margin is higher now Then before, if so, where does it mostly come from in your view? Thank you very much.

Speaker 2

Yes, thank you, Rogerio. As I mentioned before, we're always working towards being a more competitive airline. And we never bank on strong revenues because we know there are cycles in our industry. What we bank on It's having competitive cost and being more efficient and more productive. And we are a much more efficient and productive airline Back then in 2013, 2014, the bigger changes, well, we have a lower CASM ex And so we're more efficient in that sense.

Speaker 2

We've worked hard to improve our Casa mix. So we have better Unit cost, which allows us to be more profitable even with lower yields. And part of that is also having a more Effective, efficient fleet, we have a single fleet, mostly 730seven-eight 100 and MAX 9, Which have better, much better operating costs than back then and we've done a number of things. It will probably be A long list to be more efficient, but for example, we do our own C checks in house, we didn't do that back then. The distribution strategy is yielding results and there's probably there is a list Of other initiatives, we have densified the fleet somewhat and there's more to come.

Speaker 2

So yes, we're much more competitive and have better unit costs, are more efficient than when we were what we were back then in 2011, 2012, 2013 when we had a similar margin, but maybe revenues were stronger.

Speaker 11

Okay. Pretty clear. Congratulations for the very strong results And all these cost reduction and efficiency in the past years. Thank you.

Speaker 2

Thank you, Rogerio. Thank you very much,

Operator

One moment for your next question. The next question comes from the line of Josh Milberg of Morgan Stanley. Josh, please go ahead.

Speaker 12

Hey, Pedro, Jose, good to talk to you guys and big congrats on the results. I had a couple of follow ups and please forgive any repetitiveness on my side. One is you touched On the issue of your what your competitors are doing in terms of bringing back capacity, but I was just hoping you could comment a little further on that issue. How much it's been impacted by aircraft delivery delays? And also, Just on the Avianca side, if you've been seeing any impact from that airline Shift in strategy with respect to network or in any other sense.

Speaker 12

That's the first question. And then the second question is if you could comment A little bit further on your fleet plan and what it could mean for capacity growth in 2024, I know you said Before that, it's sort of early days to be getting into next year, but I know that you have the 730seven-800s that are scheduled to come off Lease, I think your plan shows you holding on to those. So any color there would be great.

Speaker 2

Yes, yes. Thank you, Josh. So I'll talk when Fleet Plan second, but we have well, I'll talk to Fleet Plan first because we have A published 2024.

Speaker 3

2024. 2024.

Speaker 2

So we're getting 12 aircraft this year and we've published that we're getting 8 Max, 8 next year. But it would have been more before It's not for Boeing delays. As we know, Boeing, Airbus, everyone has delays. So the delays are between 3 4 months, in some cases, Could be even longer for next year. So we have published 8.

Speaker 2

We hope to get more. Hopefully, we can get more than 8 Once we get the latest information from Boeing, we also have a number of leases that come due And we will renew we'll try to renew as many as we need to. And it all depends on how many deliveries we get from Boeing. So it's kind of like a Dance, the dance of the assets of the aircraft assets, so we need to balance The lease expirations with the Boeing deliveries with the demand And right now, it all looks good actually. So we're hopefully that we'll get more aircraft And demand will remain strong as it is right now.

Speaker 2

Hamed, do you want to add anything to fleet, Jose?

Speaker 3

No. Yes, I think that's very complete. In terms of 2024, as Pedro mentioned, we have right now our plan is published in our Investor Relations website, including the 8 aircraft that Pedro mentioned for 2024. Right.

Speaker 2

In terms of competitors, not sure there's much more to say. I don't like to give them like free advertising or anything like that. But you asked about Avianca. We, of course, compete quite a bit against Avianca. We have always competed With Avianca, even though we're also together in Star Alliance and we have code sharing and frequent flyer reciprocity, so I would say it's Friendly and healthy competition.

Speaker 2

And they're still growing their hub. They're also flying non stop. They've changed their model. So they have they went through Chapter 11. So they are a strong competitor, no doubt.

Speaker 2

And Does it show? Does it is it noticeable? Of course, it is. But we're also growing and competing. So there There's a balance.

Speaker 2

There's some sort of a balance there. As they grow and compete, so do we. And in terms of the rest, Well, they're pretty much back to pre pandemic capacity as we are. So is LATAM and others that were smaller back then Probably above those levels. So we're in a dynamic market with strong demand And I think it's what would be expected in any case.

Speaker 2

Thank you, Josh.

Speaker 12

Okay. Thank you very much. Those were great responses. Have a nice day.

Speaker 2

Thank you, Tafu.

Operator

Please hold for the next question. The next question comes from the line of Duane Pfennigwerth of Evercore IFI. Duane, please go ahead.

Speaker 10

Hey, good morning. This is Jake Gunning on for Duane. So just to put a finer point on Previous questions about geographic demand strength. On a previous call, you talked about point of sale for U. S.

Speaker 10

Versus local. Could you talk about just how that's trending now?

Speaker 2

I don't know if it's I don't think it's changed much. We see strength in most of our regions and markets. Maybe South America is not as Strong relative speaking as it was before. So South America is not as strong, but it's still positive. But that could change from 1 quarter to the other.

Speaker 2

And U. S. Point of sale remains pretty strong, Even though the currency, the U. S. Dollar has lost a little bit of value, still has a lot of strength and the economy as we know in the U.

Speaker 2

S. It's still strong. Even though efforts are being made to slow it down, it's resilient. So there's still strength in U. S.

Speaker 2

Point of sale. So I don't think anything has changed that much from our previous call.

Speaker 10

Okay. And then on capacity, just given demand strength And the capacity constraints, where or how much more would you want to grow without these constraints?

Speaker 2

So our fleet plan, I think, it's a good reflection of our growth plan. We're getting 12 MAX 9s this year. Next year, we have published 8 Max, 8, we'll be getting, but as I mentioned, if we could get more because we were supposed to get more, but due to delays, We're not getting them all in 2024, the ones we were expecting to get originally. So if we can get a few more, we'll be very happy and we're waiting To hear from Boeing, maybe that would happen. So that gives you an idea of our growth, which is in the double digit range.

Speaker 3

I was just going to say, Jake, that I think a good way to look at it, and this is just theoretical, of course, but look at the Preliminary full year guidance that we issued back in November, it had a 15% growth and so that was You could argue that our regional expectation of where we wanted, so yes.

Speaker 10

Okay. That makes sense. Thank you and have a nice day.

Speaker 2

Thank you, Craig. Thank you.

Operator

Thank you. I would now like to turn the call back over to Pedro Heilbron. Pedro, please go ahead.

Speaker 2

Yes, thank you very much. And so thank you all. This concludes our earnings call for the first Quarter of 2023. And so I'll take also this opportunity to announce that we'll have our Investor Today, as I think Helen mentioned, it's going to be on June 22 in New York City. You should be getting the invitations and any other details in the next couple of days.

Speaker 2

So hope to see you then next month and Have a great day. Thank you as always for your support.

Operator

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

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Earnings Conference Call
Copa Q1 2023
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