Q3 2022 Copa Holdings SA Earnings Call
Okay.
Ladies and gentlemen, thank you for standing by welcome to the Copa Holdings third quarter earnings call. During the presentation. All participants will be on a listen only mode. Afterwards, we will conduct a question and answer session at that time. If you have a question you'll have to press Star then.
One one on your Touchtone phone.
As a reminder, this call is being recorded.
Oh, yes.
All is being webcast and recorded on November 16th 2022, now I will turn the conference call over to Daniel Copier Director of Investor Relations. Sir you may begin.
Thank you Victor.
Welcome everyone to our third quarter earnings call.
Joining us today are CEO .
CEO of Copa Holdings, and Jose Montero, our CFO .
First Pedro will start by going over our third quarter highlights followed by Jose who will discuss our financial results.
Immediately after we will open the call for questions from analysts.
Copa Holdings' financial reports have been prepared in accordance with international financial reporting standards.
In today's call.
This cost and non <unk> financial measures.
A reconciliation of the non <unk> financial measures can be found in our earnings release, which has been posted on the company's website or by air Dot Com.
Our discussion today will also contain forward looking statements not limited to historical facts.
Reflect the company's current beliefs expectations, and our intentions regarding future events and results.
These forward looking statements involve risks and uncertainties that could cause actual results to differ materially and are based on assumptions subject to change.
Many of these are discussed in our annual report filed with the SEC.
Now I'd like to turn the call over to our CEO , Mr. Pedro <unk>.
Thank you Danielle.
Good morning to all and thanks for participating in our third quarter earnings call.
Before we begin.
Like to thank all of our coworkers for their commitment to the company and recognize their continued efforts and dedication to keep corp. At the forefront of Latin American aviation.
To them as always my utmost respect and admiration.
Despite the pressure that higher jet fuel prices continued to add to operating costs in the third quarter. We were able to cover this increased thanks to strong demand and unit revenue performance and lower ex fuel unit costs.
During Q3, our effective fuel price per gallon increased by 77% compared to the same period in 2019, which drove our unit cost increase of 16%.
However, both our load factors and yields also increased improving unit revenues by 15% compared to Q3 2019.
Given by currently strong air travel demand environment in the region.
The combination of these factors cross.
Across our ability to control our non fuel related cost innate.
Enabled us to deliver a 17, 8% operating margin, which compares to an operating margin of 18, 8% in Q3 2019.
Now I would like to mention the main highlights for the quarter.
Our capacity measured in <unk> reached 99% of third quarter 2019.
Bringing us back towards pre pandemic levels rpms increased slightly by 1% compared to Q3 dollars 19, which led to an 86, 8% load factor.
A one two percentage point improvement.
Passenger yields came in at 14.1 cents or 12% higher than in the third quarter of 2019, while.
Cargo revenue was 80% higher resulting in unit revenues or RASM of 12, 8%, a 15% increase compared to the third quarter of 2019.
Ex fuel CASM decreased 5% compared to Q3 dollars 19 from six 2%.
259.
On the operational front.
Copa Airlines delivered an on time performance of 86, 6% and a completion factor of 99.
Okay.
Finally in.
In October Copa Airlines was recognized by Skytrax for the seventh consecutive year.
Best airline Investor Link staff in Central America, and the Caribbean.
I'd like to remind you that earlier in the year copper was also recognized by cerium at the most on primarily in Latin America during 2021 for the eighth consecutive year.
I'd like to take this opportunity to recognize and thank our more than 7000 employees for everything they do day in and day out to offer a world class travel experience for passengers. These awards prove that their continued efforts and commitment are especially valuable toward passengers and do not.
Go unnoticed.
Turning now to our fleet during the quarter, we took delivery of one Boeing 737, Max nine to end the quarter with a total of 95 aircraft.
Compared to the 102 aircraft in our fleet pre pandemic.
In terms of our network in September corporate linked started service today.
Felipe and less international airport, which complement our existing service to Mexico City.
With the addition of this route we continue strengthening and solidifying our position as the most complete and convenient hub in Latin America ending.
Ending the quarter with service to 77 cities in 32 countries.
Sure.
Turning now to wingo.
<unk> continues its regional expansion and by year end. It expect great 31 route with service to 20 cities in 10 countries.
They're more in the fourth quarter Wingo will receive one additional 737 800 from Copa fleet.
And 2022 with a total of nine aircrafts.
To summarize the.
Despite the current fuel price environment affecting the airline industry.
We have reestablished our capacity and network back to pre pandemic levels and are consistently delivering improved financial results.
Looking ahead.
We observe a strong demand environment in the region and a healthy booking trend.
Which lead us to anticipate on increasing our unit revenues for Q4, and how your operating margins quarter over quarter. Nonetheless.
Considering the uncertainty of the current economic environment, we continue to closely monitor demand patterns in the region.
So we will remain focused and flexible in terms of cost and capacity.
Adjusting our plans as needed.
I'd like to conclude by reiterating that we have a proven and strong business model, which is based on operating the best and most convenient network for intra Latin America travel from our hub of the America, leveraging panamax advantageous geographic position with low unit cost best on time performance.
And a strong balance sheet, and we expect that or hub of the Americas will continue to be a valuable source of strategic advantage.
Now I'll turn it over to Jose who will go over our financial results in more detail.
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 world class service to our passengers.
I will start by going over our third quarter results.
Net profit for the quarter came in at $115 $9 million.
$2 93 per share.
Excluding special items profit came in at $115 $1 million or $2 91 per share.
Third quarter special items totaled approximately $900000 comprised of unrealized mark to market gain of $1 6 million.
These convertible notes.
$700000 unrealized mark to market loss related to changes in the value of financial investments.
We reported a quarterly operating profit of $143 $7 million and an operating margin of 17, 8%.
Capacity came in at $6 3 billion available seat miles, which represents almost 100% of our Q3 2019 capacity.
Load factor came in at an average of 86, 8% for the quarter a one two percentage point increase compared to the same period in 2019.
Our passenger yields increased 12, 1%.
As a result.
Revenues came in at 12 point.
Or 15% higher than in the third quarter of 2019.
Driven by higher jet fuel prices unit cost or CASM increased 16, 4% compared to Q3, 2019% to 10, 5%.
And finally, our CASM, excluding fuel came in at five nine.
A five 3% decrease compared to Q3 2019.
Although we face certain inflationary pressures as well as higher sales and distribution unit costs related to higher sales levels.
Our continued initiatives to reduce our costs have reduced a sustained level of lower ex fuel CASM.
I'm going to spend some time now discuss our balance sheet and liquidity.
As of the end of the third quarter, we had assets of close to $4 6 billion.
And in terms of cash short and long term investments we ended the quarter with one 1 billion.
Which represents 42% of last 12 months' revenues.
As to our debt.
We ended the quarter with $1 $7 billion in debt and lease liabilities and are adjusted net debt to EBITDA ratio came in at 0.8 times.
Turning now to our fleet during the third quarter, we received a one 7% Max nine to end the quarter with a total of 95 aircraft.
In October our total fleet increased to 96 aircrafts since we receive an additional surgery center and Max nine.
With this addition, our total fleet is now comprised of 68 737, eight hundreds 19, 73% of Max Nines, and 90 737 seven hundreds.
These figures include one 737 800 trader.
Of our total fleet two thirds of our aircraft are owned and one third is under operating leases.
For the remainder of the year, we expect to receive one additional 737, Max nine and so we expect to end the year with a fleet of 97 aircrafts compared to 102 aircraft in our fleet at year end 2019.
In 2023, we expect to receive 13 additional aircrafts 12, Boeing 700% and Max Nines, and one 7% Max eight.
We've already secured financing for seven of these aircraft one aircrafts through a sale leaseback transaction and six through Japanese operating leases with cautions.
As to our outlook based on the current strong demand environment. We can provide the following guidance for the fourth quarter of 2022.
We expect to operate approximately $6 5 billion, ASM, which implies a capacity increase of 6% compared to Q4 2019.
And we expect an operating margin of approximately 22%.
We're basing our Q4 2022 outlook on the following assumptions.
Load factor of approximately 88% unit revenues of approximately $13.07.
Ex fuel of approximately <unk>.
And all in fuel price of $3 75 per gallon.
Regarding next year preliminarily based on our current fleet plan, we expect our capacity measured in <unk> to.
To increase approximately 15% versus that of 2022.
Thank you and with that we'll open the call to some questions.
Thank you and as a reminder to ask a question you need to press Star one one on your telephone.
Please standby, while we compile the Q&A roster.
Our first question comes from the line of Duane <unk> from Evercore ISI. Your line is open.
Hey, Thank you.
I wanted to ask you about competitive capacity you know this this analysis gets a little noisy with everything comp year over three year end versus 2019, but but if we actually look.
Year over year, it looks like Central America to the U S is one of a few regions in the world where capacity is actually down year over year. So I wonder if you could just comment.
Broadly on what you're seeing from a competitive capacity perspective in your markets.
In the fourth quarter versus the third quarter.
How are you doing Pedro here.
So central America to the U S could be down but it was it was.
Higher right after the pandemic.
So it's coming back to a more normal level in a way we could say that.
The main airlines in a region. The main international remains will be back to nearly the pre pandemic capacity by the end of this year. So by the end of Q4 'twenty two and then the new entrance in Vlccs are above pre pandemic.
Yeah.
Okay and then.
On dividend policy apologize if you're if you mentioned this but but how are you and the board.
About you know a restoration of the dividend and kind of the historical payout and how do you think about buybacks versus dividends here, obviously, you've done a substantial amount of buyback already in and an incredible amount of buyback for an airline.
Right. So so.
The the dividend policy.
Its still there it was suspended when the pandemic started.
To be reactivated it's a decision the board must take.
I am assuming that that's going to be discussed.
In the next board meeting after Q4 closest.
Yes, Duane and in terms of the buyback as you mentioned, yes, we've been active we have an active program of two.
$100 million that is not yet completed and our rationale for the program is a as you know.
As we've always had to maximize shareholder value, but also as a tool to.
Have some management of our liability related to the convert.
So that's kind of the rationale of the buyback program that we've been executing.
Okay. Thank you very much.
Thank you Duane.
One moment for our next question.
Our next question comes from the line of Alejandro stomach corner from Credit Suisse. Your line is open.
Yeah, I think you said it was gonna say Danielle. Thank you for taking my question.
My first question is on the.
Expectations for 2023, so besides the capacity growth of 15% that skill set.
Are there any early expectations in terms of yield.
Fuel costs profitability, especially for yields.
That oil prices have started to normalize.
And for cost.
I mean, all the high inflationary environment. Thank you.
Yeah, Andrew I, you know we issued our preliminary guidance just in terms of capacity at this time.
We'll probably have a more visibility into 2023 of them. So well hold on until then for for a more.
A clearer more comprehensive.
Our guidance for the full year.
We will have more visibility on the specific factors you have mentioned for sure.
Okay.
And then my second question, if I may regarding the labor Union negotiations.
And could you share any thoughts on the current negotiations on expected outdoor outcome.
Yes, we have.
Four main unions.
Earlier in the year, we close negotiations with the airport workers.
And the mechanics.
We're currently in negotiations with the pilots and in the final stage with the cabin crews.
I would not like to speculate on results.
Yeah.
Okay. Thank you.
Mhm.
One moment for our next question.
Our next question comes from the line of Michael Lindenberg from Deutsche Bank. Your line is open.
Oh, Yeah, Hey, good morning, everyone.
Good results by the way great outlook.
Couple here Jose just back on the share repurchase it looks like this last quarter, maybe it was a little over 20 million in the previous quarter, maybe it was $121 25.
If I think about what $200 million in total what do we have about $50 million left 60 million can you just give us what's left in the program.
So it's a little bit more because there is a portion of what we purchased in the second quarter that was associated with a prior program that we had so there's a little bit north of I think about $100 million left in our current program.
Oh, great. Thanks, Thanks for pointing that out and then just my second question.
Either you <unk> Pedro this 88% load factor in the fourth quarter not.
Not only is it very high but and of course, youre, bringing that capacity now.
But it's up versus the third quarter. So we have sequential improvement I think pre COVID-19.
Normally seasonally you would see loads, maybe dip down a half a point a 0.2 points. We could go back and do a 10 year average and you probably see a few points less.
And I'm just trying to get behind why the load is higher it's sort of counter seasonal move on one hand on the other hand your network will now be fully back to normalcy, and maybe youre getting the full benefit of of connecting across all your various banks and that's helping drive that additional load factor.
Despite the fact that capacity is up can you can you just kind of give us.
Walk us through maybe whats driving that because it does seem very unique and interesting.
Yes.
Hi, Michael.
Hey, Joe.
Things have changed of course since the pandemic.
<unk> are slightly different demand is strong right now.
It doesn't mean that it's going to be strong forever yields are strong driven by higher fuel price, but we will know for how long either.
Then a competition as I mentioned before has been gradually.
Adding back capacity.
Some will come back some timing this quarter and others are already above pre pandemic. So theres. So many moving parts are so different.
That we're really having a hard time predicting exactly how how the man, it's going to behave a quarter over quarter. So this is like the best of what we can see right now and that's kind of like.
That's all I got.
You know the most we can say because again, it's all it's all changed.
It sounds like it's just a period, where all the planets are in alignment and you're just getting getting good numbers.
Yes.
Exactly.
It's a good assessment.
Great well thanks, everyone.
Thanks, Mike.
One moment for next question.
Our next question comes from the line now Savi sits from Raymond James Your line is open.
Thank you and good morning, everyone.
Just on the cuts that 2023 capacity could you talk a little bit about the the mix in terms of stage and up gauging and new departures in that 15% as well as I I Wonder if you can talk about how youre thinking about you know new markets Roche is kind of building back frequencies.
Yeah, I would say that about a little bit more than half of that capacity is just full year effect of.
Some of the capacity that we built in <unk> during 2022, and then the remainder is probably going to be.
Between gauge and frequency into markets that we already serve.
That focus more anything is going to be on on initially sort of full year effect and then.
Frequency into markets that were observed with kind of the additional gauge.
And at this stage, what kind of what we have.
So kind of a lower risk growth there then.
I would say so yes.
I mean, the hub still.
I have right now 70 sand markets, our 77 cities.
We had 80 prior to the pandemic and so I think that there is still <unk>.
The opportunities in terms of cities and new markets that we would serve and I think there's going to be some of that but the majority of the growth is going to come from from the latter or the other two areas that I mentioned.
That's helpful and then if I might on the <unk>.
Okay.
Kind of revenue strength that you're seeing is it.
Is there any kind of.
The color that you can provide on business and corporate it seems like most of the commentary we're hearing across the various geographies as it's really coming from leisure and VFR are you seeing kind of a more return to corporate or and I know some of the <unk>.
Premium capacity in your in your markets have maybe come off and wondering if that's helping you gain any corporate share.
Yes, Pedro here Savi.
So it's still mostly leisure where the strength is coming from but business is up our corporate accounts. For example, our 75 at 75% of pre pandemic and overall.
Business is now around 25% of total revenues.
Before.
The previous quarters. It was about 20%. So we are seeing a little bit of an uptick in the business traveler.
Are you seeing any improvement in Asia.
Our valuation right as the premium seats in your in your market and the competitive premium TTM market lower now or.
Is that not in the very noticeable.
I don't think there's that much of a switch.
Switch.
Are you talking about competitors right.
Exactly yes.
Yeah.
<unk>.
Yes.
Yes.
I don't think there is a clear picture there.
Okay I appreciate the color. Thank you.
Thank you sorry.
Yeah.
Once again Thats star one one for questions one.
One moment for our next question.
Our next question comes from the line of Stephen Trent from Citi. Your line is open.
Good morning, gentlemen, and thanks very much for taking my question.
I was wondering if I could just dig in a little bit on the capacity growth for 2023, I mean, it seems in terms of your <unk> cost cadence Youre outperforming most of the U S Airlines per se.
And when we think about moving into 2020 three how should we think about.
Sort of the best.
Split between FIC.
Fixed and variable costs for example.
You know as we think about.
I know for instance, the up gauging that you've done from Embraer as to Boeing's and some seat densification.
Just sort of wanted to dig in and.
Your success in.
What seems to be limiting sitting in our cost.
Some of your North American competitors. Thank you.
Yes, Steve I'll start with.
Relating a little bit of how we got here we have.
Reduce our CASM ex fuel between 2019 to 2022 by around 5%.
And that's come as you mentioned with the fleet moves that we made with their fleet simplification and streamline overhead is.
Cross the board and.
Pro forma other tweaks, including some tweaks in our in our.
Onboard offerings et cetera.
Going forward, we will continue doing.
More of that.
I think that we still are trying to to put everything together in terms of our 2023.
CASM guide and I think in February we'll be more ready to give a full year unit cost guide for the year, but as you well mentioned all the items that you mentioned the continued growth of seven 3% in fleet.
Acacia et cetera come into play as well and moving forward and keeping our costs in a very competitive position.
Okay Super I really appreciate that Jose just one other quick question.
If my memory serves me correctly, which it might not.
I recall that in the past maybe a couple of years ago, when I think about your fleet mix.
At least for us at all and that it was kind of somewhat more 80 20 as opposed to the two that I believe that two thirds one thirds you mentioned.
And then you know as that shifts.
Is my understanding accurate and when you think about leased versus owned or is it a matter of where do you see the most attractive financing opportunities or.
With Windows growth, maybe youre reluctant to take some of the asset risk on.
The <unk> just love to hear your thoughts on that thanks, Yeah, absolutely no. It's actually not shifted too much it's been kind of in that two thirds, one third for it for a while and.
We usually and it depends on the moment it has been because of at points in time in the past because of aircraft availability at a particular moment, but ultimately we make our decisions for financing based on.
What they better options are there from a purely.
Economic perspective, so so.
It's kind of a driving factor is having.
Aircraft operating leases also gives us some flexibility in terms of flip language as a key portion of it. They all have staggered expiration dates and that allows us to plan ahead in terms of capacity. So that's kind of the rationale that we followed over the last.
Several years.
Okay very helpful. Thanks, very much Jose.
One moment for our next question.
And our last question comes from the line of Helane Becker from Cowen Your line is open.
Helane Your line is open.
Yes, sorry, I missed I missed that somehow thanks for the time gentlemen.
Just two questions can you talk about the improvement in fuel efficiency with replacing the older.
Older aircraft with the Max.
And then the other part of the question is could you maybe talk about.
The loyalty program the uptake the increase what you've experienced in the past maybe year over year.
On on on the acceptance of that program.
Thank you.
Yeah in terms of fuel there's a couple of items of note.
The macro base in terms of fuel efficiency.
Delivering.
The LNG and so I remember in our case, we also replaced ultimately some of the 100 <unk> with mattress or a benefit in terms of fuel consumption was.
Also very good so it's in the low <unk>.
Double digit range in terms of fuel efficiency.
On a like basis or it's again performing as advertised.
On a few basis.
The other item that is important is that.
We as a company pursue quite a bit.
Fuel conservation efforts or the.
Several years and so besides just purely the operational fuel efficiency of the aircraft. We also have embarked in multiple multitude of initiatives from the operational side from the maintenance side and from even from the finance side to reduce our fuel consumption as well those are.
Our.
Maybe there is a set of about 12 or 15 metrics that we follow on a specific matter on an ongoing basis without reservation that is also aided in our overall fuel efficiency over the last several years.
Yeah.
Okay in terms of in terms of Oh go ahead.
Sorry, and items that will give you. An example of something that is.
We've been able to like.
Centers of gravity of aircraft just minding the aircraft center of gravity on every specific slide is something that adds a lot of value in terms of fuel conservation. So it's items like that that we.
Measured and pursue whatever every single flight so.
I think it's a good.
Good development there.
Sorry, Patrick yes.
Hey.
And then in terms of our loyalty program, we have ensured marching formation in the past.
But I just.
Took the node because maybe maybe we can make a special presentation during our Investor day.
Next year it maybe we can share more information.
But it's doing well I mean.
It's not of course, it's not a huge program as it goes right to our site and the size of our home market, but it's a very successful program is growing nicely.
And again, maybe we can share more information during our Investor Investor Day.
In terms of going back to Steven's questions. In your question in terms of fuel efficiency and up gauging or densification.
Okay.
I think it's interesting to notice.
Is that in Q3, our <unk> are only slightly below our 2019 level.
But if you look at our block hours.
There are about 7% below 2019, so we're delivering a much higher ASM.
Per flight and that has a direct impact in our ex fuel CASM and even in our fuel proceed.
Performance.
Actually that's what.
Prompted my question the fact that.
You are within a percentage point and but your fuel consumption is lower.
Yes.
And it's not explained entirely by vice obvious question about length of haul on stage. So that was a problem.
And then just one last thing.
Right before the pandemic started you guys had started the Panama layover.
Just wondering if the uptake on that has started to increase again.
It has this year it would be at this year's going to end pretty much in the same numbers, we had in 2019 pre pandemic.
In the range of 100000 a.
Passengers.
Given take a few thousand so it's doing very well and we're going to keep on pushing it next year in 2023.
Great. Thanks, very much gentlemen.
Thank you Elaine. Thank you now I'd like to turn the conference back to Mr. Pedro <unk> for closing remarks.
Okay. Thank you operator Victor.
So thank you all this concludes our earnings call for Q3 2022, Thank you for being with US and thanks for your continued support have a great day and we'll see you in the next one thank you.
And this concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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Yeah.
Okay.
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