Q2 2019 Earnings Call
Thank you Barbara and welcome everyone to our second quarter earnings call.
Joining us today are <unk> CEO of Copa Holdings also meant that our CFO .
First I will start with our second quarter highlights.
Finally, Michael say, who will discuss our financial results.
Immediately after we will open the call for questions from analysts.
In today's call, we will discuss non <unk> financial measures.
A reconciliation of the non my first way up or other financial measures can be found in our earnings release, which has been posted on the company's website called <unk> Dot com.
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 just thought in our annual report filed with the SEC.
Now I would like to turn the call over to our CEO Mr. pivotal <unk>.
Good morning, two on thank you for participating in our second quarter earnings call.
First I would like to congratulate or coworkers.
For their efforts during the quarter.
Especially their ongoing hard work to minimize the impact of the Max rounding on our customers.
Our teams commitment and dedication keeps us at the forefront of Latin American aviation.
Today, we're pleased to report solid results for the second quarter.
More importantly.
An improved outlook for the rest of the year.
Air travel demand in the region continues to improve and our industry is also benefiting from a more rational capacity environment.
Specifically for Copa.
We continue seeing the benefits of the many commercial initiatives that we have been implementing over the past years.
Generating incremental revenues from our frequent flyer program and ancillary products.
Hi, its work better revenue management practices.
Also.
Despite the Max fleet grounding, which puts tremendous pressure in our operations on unit cost.
We have been able to keep costs under control.
Well delivering world class operational numbers.
I'd like to take this opportunity to again in fact, our entire corporate team for their efforts on resold.
Among the main highlights for the quarter.
Driven by the Max Fleet grounding.
Our capacity measured in <unk> cent decrease year over year by 4.3%.
RPM decreased only 2.5%.
Resulting in an 85.1% load factor 1.6 percentage points higher year over year.
Yields came in at 11.8 cents, 4.1% higher than in the second quarter of 2018.
This higher loads and yields resulted in unit revenues or RASM of pinpoint in five cents, a 6.3% year over year increase.
On the cost side.
Ex fuel unit costs came in at 6.2 cents.
How your year over year due to the Max fleet dropping.
And the timing of certain expenses, but still among the best in the industry for a full service carrier.
Oh, sorry, we sold our operating margin came in at 12.8%.
3.3 points higher year over year in what is our weakest quarter.
And on the operational front.
Coal burning deliberate in an on time performance of almost 91% and a completion factor of 99.8%.
Again, among the very best in the World.
As a reminder, we have six wrong that Mac nine aircraft.
And we were supposed to have taken delivery of another three during the first half of the year as was four more in the second half.
In response to this situation, we continue making the necessary schedule changes and cancellations.
Assuming none of our Max aircraft will be in service before the middle of December .
Obviously, the grounding of the Max fleet is having a significant revenue and cost impact.
Which will become even more substantial in the second half of the year.
It is important to know to note. However that this impact is included in the operating margin and capacity figures provided in our guidance, which will say will discuss in more detail.
On the bright side the demand environment continues to improve.
We're seeing strong booking patterns and improving yields in much of our network.
Looking back at 28 team.
Rusty on Argentina stood out as the most challenging markets, where they topic economic on demand environment.
Now demand in Brasil, with improving and should continue benefiting from a more rational capacity landscape.
However, in the case of Argentina.
We're still seeing negative year over year numbers.
And we have been proactive managing our capacity in that market.
As I mentioned, we're making good progress on our ancillary revenue effort.
We're on track to achieve our incremental revenue target for the year.
And continue rolling out new products, and expanding and optimizing our current offerings.
In fact, we just recently expanded our second bag fee to our entire network.
We also continue benefiting from developing our own IP solutions.
Earlier this year.
We launched a new web and mobile check in system.
With great reviews from our passengers.
And we're now beta testing or a new call Bob.
Which was completely redesign.
This development.
Which allow us to be more responsive to our customers while further lowering our unit cost.
Our part of the company strategy.
To develop more proprietary IP solutions.
We're also advancing as planned with implementation of that for logic pattern.
To deliver a merchandising and distribution capabilities across all channels.
Finally, we will also be very small 2% of our revenues continues to do well both operationally and financially.
In the fourth quarter, we'll start up gauging the Wingler fleet to 800, which will further lower unit cost and improved profitability.
When were 50 aircraft, which will be based in Panama and West originally scheduled for late 2019.
Has now been postponed to Q2 2020 due to the Max rounding.
To summarize.
We delivered solid second quarter results and are seeing an improving demand environment for the rest of the year.
We continue making progress on our ancillary revenue initiatives and are on track to achieve our 2019 targets.
Our team continues to deliver world class operational performance, while achieving industry leading unit cost.
Despite the challenges presented by the Max grounding.
Finally.
We're confident that's ever in our business model and our financial position.
We have the strongest network for travel within the America.
Exceptional operational performance that results in high customer satisfaction.
An extremely flexible fleet plan the lowest unit cost.
A very strong liquidity position with low leverage and a highly committed team.
Before turning it over to Jose I would like to invite you to our Investor day, which will be held in Panama December Threerd and fourth.
For those interested in attending we will post a registration link in the events and presentations section of our IR web page in the upcoming weeks.
We look forward to hosting you in Panama.
Now I'll turn it over to her several will go over our financial results in more detail.
Thank you Pedro good morning, everyone and thanks for joining us.
Let me begin by joining pinnacle in congratulating our entire team for all their standing achievements during the quarter.
Due to the grounding of the Max fleet, our capacity for the second quarter was 4.3% lower year over year, while revenue passenger miles decreased only 2.5%.
Which resulted in a consolidated load factor of 85.1%.
The 1.6 percentage point increase versus Q2 2018.
Passing your heels shorter recovery and came in at 4.1% higher year over year, which combined with the strong load factor resulted in a unit revenue increase of 6.3%.
From 9.8 cents in Q2 2018 to 10.5 cents in Q2 2018.
Consolidated revenues increased 1.7% to $645 million.
On the expense side, our second quarter operating expenses decreased 2% year over year under 4.3% capacity reduction.
Which resulted in our cost per available seat mile increasing 2.5% to 9.1 cents.
For the quarter, our effective all in fuel price averaged two hours and 22 cents per gallon.
The decrease of 5.3% versus the $2.35 per gallon that we average in Q2 2018.
The cost per available seat mile excluding fuel ex fuel CASM increased 5.7% from 5.9 cents in Q2 2018.
To 6.2 cents in Q2 2019.
Mainly due to the costs associated with the grounding of the Max fleet.
Including the resulting lower capacity output as well as the timing of certain expenses.
Operating earnings for the quarter came in at 36.7% higher at $82.6 million, resulting in an operating margin of 12.8% 3.3 percentage points higher than Q2 2018.
Looking at nonoperating income and expense the second quarter generated a net non operating expense of $11.9 million.
Mainly driven by net interest expense of $7.5 million and at $2.2 million translational foreign currency loss related mostly to the Argentinian Colombian currencies.
Our tax expense with quarter also came in higher at $19.9 million.
Related to the timing of certain tax payments in Panama.
For the full year, we expect our effective tax rate to be in the range of 13%.
In terms of net results net earnings for the quarter came in at $50.9 million earnings per share of $1.20 cents, 2.1% higher than the earnings per share reported in Q2 2018.
I will now turn to the balance sheet.
We closed the second quarter with a very strong financial position.
Assets totaled $4.5 billion.
Owner's equity totaled $1.9 billion.
Our debt plus our lease liability total approximately $1.6 billion.
And our lease liability adjusted net debt to EBITDA ratio came in at 1.1 times one of the strongest in the industry.
Keep in mind that we are now adjusting the net debt by including the lease liability line from our balance sheet.
We closed the quarter with approximately $1.2 billion in debt more than 60% of which is fixed with a blended rate, including fixed and floating rate debt of approximately 3.1%.
In regards to cash short and long term investments, we closed the quarter with close to $900 million.
During the quarter, our free cash flow generation was close to $140 million and our cash balance at the end of the quarter represents approximately 34% of last 12 months revenues.
In terms of fleet, we ended the quarter with 104 aircraft 60 877 800.
14, 737, 760 number one night and six Max Nines.
We had originally planned for seven additional Max aircraft to be delivered during 2019.
Once the macaroni is lifted we will be able to determine the revised delivery stream for these aircraft.
Finally, I'm pleased to announce that our board of directors has ratified the third quarterly dividend of 65 cents per share to be paid on September 30 to all shareholders of record as of August Thirtyth.
So going back to our results and to recap we delivered solid financial results for the second quarter, we expect demand for air travel in our region to continue improving during the second half a year.
Despite the grounding of the Mexicali, we're still delivering competitive unit costs.
We expect to continue improving once a max ground lettings lifted.
We have one of the strongest balance sheets in the industry and we continue to return value to our shareholders.
Today, we're also updating our guidance for 2019.
Please keep in mind that our guidance make certain assumptions regarding the impact of the grounding of the Max fleet.
Including an assumed return to service of the six aircraft currently in our fleet in the middle part of December .
Any changes in these assumptions could influence the guidance for the year.
That said, we're adjusting our full year capacity outlook to reflect the year over year and some reduction of approximately 2%.
And given the significant improvement in our unit revenue outlook, we are increasing our operating margin range to 15% to 17%.
Our 2019 for your guidance is based on the following assumptions load factor of approximately 85%.
Higher RASM of approximately 10.8 cents CASM ex fuel of approximately 6.3 cents driven by the reduced number of asms for the year related to the grounding of the Max Fleet, and then effective effective fuel price per gallon, including into plane of approximately $2.15.
Thank you and with that we'll open the call up some questions.
Thank you and ladies and gentlemen, if you have a question at this time just press Star then the number one key of your Touchtone telephone. If your question has to be Nantero, you wish to remove yourself from the queue I step out key and our first question is from Josh Milberg with Morgan Stanley .
Good afternoon, Pedro Thank you for the call and congrats on the numbers I know, it's difficult to break it down but I was hoping you got you could talk about how much you think the Max grounding itself drove your better unit revenue performance as opposed to two disappointing from other players in the region and also better demand and I also wanted to see if you could comment a little further on what's happening in the individual markets you mentioned, Brazil, improving Argentina still failing to are those two countries still 90% of what's going on or have you seen some important evolution in Colombia or in some of your other markets.
Hey, Josh. Thank you for the question I'm going to answer the first part and.
And specifically related to the RASM.
In fact of the Max.
I'd say the majority of the of the RASM improvement that we're seeing and the adjustment to the guidance is really driven by the environment, both the macro and competitive environment, we're seeing improving.
Environment or in terms of revenues, so I'd say the majority of the of the.
Increasing our guidance is related to that so the Max I'd say, it's probably.
I wouldn't say more than.
Then a point out of the or or.
Of the four point increase that we have in terms of RASM.
Versus the prior guidance.
Hi, Josh this is Pedro.
So in terms of your your second question.
Rescuers scene is seen probably the highest improvement year over year compared to most market. So that's also because the comps are much easier in Brazil, given how tough what the second half of 2018, but but still I think a healthy on its own merits and even with easier comps and most other markets are also showing a healthy improvement I should also say that capacity, it's been it's been either flat or down in most markets, including Brazil in the case of Argentina, It's still down not by much by the same percentage just asking 2018, but obviously 20.
2015 was a big drop so the comps are very easy, but still negative year year over year. So we're not seeing much improvement there. So I would say is that overall most markets are doing well, except that one exception that I just mentioned.
Okay, that's great color and if I could just squeeze one more question and related also related to the Max.
Assuming that it comes back and turns back into service went when you now expect at the end of the year could you just give us a little bit of an idea of what range of capacity growth, we might see or we could see in 2020 and also.
How about might be distributed in the different markets.
Hi, Josh.
So we're not we're going to leave our our 2020.
Guidance for the November call, our preliminary guidance for 2020, so we're not going to provide.
A growth profile for 2020.
But well yeah, there is going to be a backfill the capacity that we gave up because of the Max and so there's going to be a filling up of frequencies that we had to cancel because of the Max so far so it's going to be in kind of the first order of business and they're there I think we will then introduce the fleet.
Especially during the high season period, so that I think will be a good thing in terms of the total capacity outlook and to be honest in 2020, we still have a lot of flexibility in our fleet plan. So we can adjust and so and we will only grow.
What.
We consider to be a profitable growth in 2020, but it will be of course a.
There will be some growth into 2020 fleet plan from what we're seeing in terms of assets.
Okay I think in the past you guys have talked about a fleet count growth of 2% to 7%.
Is that would that apply next year.
Yes, you could say that that's that's accurate.
And of course, the mix has more and more and more seats on the density of seats is higher so you might.
See a little bit more of a of an impact in terms of asms.
Okay. That's great perspective, thank you guys.
Thank you and our next question.
Excuse me comes from savvy, she is with Raymond James.
Hey, just to follow up a little bit.
Question on the Max at.
Just how many aircraft.
Maybe.
You can end up just wanted to understand like how quickly once the Max it's kinda on ground that you can start to to take that.
Next aircraft and also just any thoughts on Capex.
We want take many macs this year.
Right, so starting with the first question Savi.
We.
We can you know obviously depends on on when Boeing on ground when the FDA on grounds. The aircraft. So that that's going to have that's going to have an impact we were supposed to.
We have received.
We had some supposed to have received seven aircraft this year incremental a seven incremental Max aircraft this year.
And no right now, we're not sure, but but voted it might be somewhere between four or five is there on ground that schedule or announced.
And that's on top of the stake now we're already operating so the six that we have here. We think we can get those back in the air in a in a month. So in a four week period, we should be able to outgrow six in the year then the other one that.
Have yet to be delivered go through growth repos delivery modification process. There are certain things we added back the entertainment system et cetera.
So it will take us a wrong, probably it's going to take us around three weeks to get those back in the air. So so is the Mac is on growing that a schedule even with some some room for delays that we have factoring in our this mid December a forecast we would we would expect to have the fixed line by the end of this year, but then view over the other we might receive will be gradually incorporated.
You know if it if it if it coincides with our with our January or whatever December January and February high season, we can fly all of them. If it's later and it hits our low season, then we will we might not play them all right away, we will make a gradual introduction.
And sorry in terms of Capex for this year is still.
To be determined in terms of total capex, because we have not yet 100% clarity in terms of the number of aircraft that we will receive this year. It all depends on when ultimately when the Max gets grounded on ground it but in terms of cash Capex I'd say, it's most likely around $150 million for the full year 2019.
And remember that we.
Finance, 100% of the asset. So therefore, I think that the the Forefingers cash Capex I would say, it's about a 150.
And.
I might ask a follow up on the on the non fuel cost side between Threeq and Fourq. You are there any timing items that we should be mindful about related to either maintenance or kind of performance bonuses.
No no I think that the bad the trend that we're seeing now means that for the full year.
We will end up somewhere around 6.3 cents and so there, but you know there are some timing of expenses toward the final part of the year. So maybe in Q4, you'll see a little bit more than that our portfolio will ultimately translate to a 6.3 cents CASM ex with where.
All right. Thank you.
Thank you so much and next question comes from Duane Pfennigwerth with Evercore.
Hey, thanks.
Maybe just a hypothetical question for me to start with on the on the tail end of earnings season.
If you can expand yields and load factors.
And now to offset non fuel cost pressure and expand your margins while shrinking.
Why not continue shrinking assuming you had total aircraft flexibility next year.
Why does it make sense to grow at all.
Well, you know it and let's start with that one and maybe how they can kind of help me Duane.
So it.
It would there would be I hit to EPS.
Our our EPS for the quarter would have been higher if we would have had our full capacity available and obviously you know there are different there see some during the year. So there are times when when we can handle better shrinking a little.
But we will not do nearly as well and the higher season and overall for the full year. You know when we were projecting growth is because we think it's going to be profitable growth and it's going to be it's going to be accretive to our repeat and not just in the quarter and the long term right on horse. So you have to also consider that but yeah. We have a lot of flexibility in and we are always looking at overall.
S.
Impact on on our on our measures.
Those are those are fair out those are fair answers.
With respect to next year, sorry, if you already said it but how should we be thinking about at least preliminarily 2020 growth.
Yes, again, we are not going to go there yet because its still very early you know there's there's some uncertainty still in terms of what the delivery stream of aircraft is going to be and so there is there. Some there's some uncertainty in that sense out there, so but but it it could be.
Are you considering when you consider the base or where we are kind of that 2019 base was smaller than the 2018 base the growth profile could be all the way up into into the <unk>.
Double low double digit range.
But again its theres still embedded a lot of flexibility in the plan depending on how demand is and and also in terms of what the ultimate delivery stream of aircraft is going to be that's a key factor that we still are very early on in the in the game still.
Understood and then just lastly.
On the non op.
You know your net interest expense plus some of the FX.
Gains and losses.
Can you give us a sense for your outlook on that line for the remainder of the year.
In the first half pre tax margin was a couple of percentage points lower than your op margin.
So should we be thinking about pre tax margins in the kind of 13 to 15 range given your op margin guidance and thanks for taking the question.
There's some timing, especially the FX and I think that the that the interest lines are should should be basically.
Behaving the same way there is some timing of.
In the fixed line that that moved to specifically in Argentina, and in and in Colombia, and it was mostly related to.
To the way that the currency ended in the quarter and so these are more I think these are translational effects I'd say that those I think that line probably see a note I want to say a little bit of a lower movement because of some second half a year.
Effects that we are expecting bought bought a I don't I don't see a significant sort of change in the way that they're they're shifting.
And in terms of the other aspect, which is the tax line. There we had a particular.
Impact during the quarter because of timing of some payments here in Panama on and we expect the full year.
Tax rate to be about 13%.
Okay. Thank you.
Thank you.
Thank you our next question.
Shawn Hunter Keay with Wolfe research.
Hi, everybody good morning.
Jose can you talk a little bit about how you're able to demonstrate so much cost flexibility I'm I'm looking at the the wages line, which was down year on year.
But if you want to maybe sort of.
Take that into a bigger conversation about how much your costs are variable versus fixed non fuel cost of course I'm just curious to know how you're able to to show such flexibility with such short notice on some of these line items on the cost side. Thanks, Yeah.
Yeah Hunter so.
I have to start by saying that that given this.
Maximization, we we had you know we we basically fast forward a lot of the cost savings efforts that we had been working on.
Over the last several months and.
And so we froze new expenditures and we look at all of our overheads and and really did a lot of work on that and I have to eat a lot of credit to the corporate team.
In general that.
They are really worked very hard at this and there's an ongoing sort of effort that we have.
And in terms of the salaries line. There is a portion of that that is that is.
That is variable.
In the outpatient is more anything but I'd say the majority of the effort is truly a cool buyer for that we have in terms of our discipline that we have shown in the past and though we showed right now it was really a team effort here in terms of the cost savings that we that we deliver.
Okay. Yeah. That's in my my follow up to that is sort of related I mean, as I know I don't want to get ahead of the 2020 Guy just yet, but how much of the cost if theres a number you want to put a that'd be great, but how much of the of the cost improvement relative to the change in capacity you think is sort of a one time.
Thing that will come back you talked a little bit about maybe double digit capacity growth next year I'm not going to hold you to that of course, but how much of that cost is going to come back how much of this cost is really just kind of core repeatable stuff that we might.
Sort of be surprised to the upside and 2020. Thanks.
Yes, you know Hunter I, let me put it to you. This way I think that if the the Max we increased that have the Max guidance to six three I think had been Max a grounding would have not occurred already been shorter amount of time, we would have beaten our six to gotten who've come inside the 6.2% a guy that we.
We're gonna.
They've put out or we put out this earlier in the year and the year. So they were very confident in terms of our cost savings going forward and we've done. This again not just in terms of our overhead et cetera. We've also worked on distribution efforts and efforts in many many aspects of the operation. So it's an ongoing effort that we do all the time all the time constantly.
So so much Pedro here so.
What I will say what Hussein is that.
The train or the duration, we're working towards and putting a lot of effort into this is to move towards.
Six and will be low and that direction not in the opposite direction.
Okay. Thank you very much.
Yep.
Thank you. Our next question comes from Matthew when Sninsky with Barclays.
Hi, Thanks for having me on it.
That's on a good quarter.
I just wanted to quickly it's guide kind of reiterate on him a few questions that were asked but you know given the the the raise in the margin guidance is it should we just be viewing this as kind of a just a short term thing or is there something that management can really do despite the despite the elevated growth next year too to keep this level of margins going forward.
Yes Matthew.
This I mean, the margins we're guiding to are very much copel like it's what we've done over time consistently and even even even in the very very difficult 2015, and 2016 years in Latin America. If you remove the bad hedges fuel hedges, we had we will get to margins very similar to what we're guiding to this year. So we're very confident that this is something that we can do sustainable.
And we have evolved as a company special in terms of our unit cost, which we have been lowering consistently to up to become a company that can do well even in a lower unit revenue environment.
Okay, Great. That's helpful. And then there's been several questions about growth next year I was hoping maybe you could.
Talk a little bit qualitatively about what the growth would be is there a backlog of new of new markets is there just a lot of demand in current routes anything you can share about what the growth is going to look like not share outside of just specific percentages.
Thank you Yeah, Matthew I think there are a couple aspects on growth for next year. One is gauge where the Max nines are larger airplane. So there's going to be portion of the growth coming directly from gauge and AMDR is frequency. This year with a match round they would have to reduce quite a bit of frequencies into into markets, where we are.
Where we operate and those frequencies are going to come back as.
As we put in the fleet again.
Okay, great. Thank you.
Thanks, a lot.
Thank you. Our next question is from Helane Becker with Cowen.
Thanks, Operator, hi, gentlemen, thanks very much for the time just two questions here. The first question that I have is.
Has there are Pedro on the pilots that were flying the Max are they what are they doing are they playing other aircraft and and as everybody just flying less or how are you absorbing those guys and gals.
Yes, we're we're angles you are right we have a very very very high percent of I mean relative to the industry.
Female pilot, which is great. It they our Max pilots fly the 800000 CNG fleet also a so they're all flying but less hours of course. So so you know in a way there are carrying some of the pain a.
From this this grounding, but they're all flying and we keep training training them in our Mac simulator and the whole things there are being kept current on the Mac, even though his airframe PNG is right now.
Okay and then my other question is you guys didn't talk about anything with all the ONGC I know there. That's how you guys were talking to them and United about a deal and I was just wondering if there was any update.
Yeah. The only it conversations we have with them are in regards to the joint business agreement. The three way joint business agree agreement, United Avianca, and Copa which has not been filed the Ed that has been delayed for for many reasons I can say with certainty when it will be filed but we continue talking to them on United about that JV, which we do hope to two filed by one point hopefully in the coming months.
Okay, all right well, thanks very much we'll see you soon.
Thank you bye.
Thank you and our next question is from Joseph Denardi with Stifel.
Yes, good morning.
Let's see I think a year or two ago. It at your Investor Day, you talked about the margin contribution you're expecting from the loyalty programs. Just wondering if you could.
Update us on.
Maybe in terms of.
How much of the full year margin guidance.
It's a function of the loyalty program.
Whether what you see.
It makes you more or less confident than maybe.
Yeah, Joe we I think I mentioned that the loyalty program will contribute around one to one and a half point of.
Margin and that that's a I think been completed we're very happy with the program with the growth of the program and its actually provided quite a bit of a value.
For us so, but and I think it's still growing it is it is still has a lot of growth potential in terms of what we can do with it not only in terms of number of customers, but also in terms of all the.
Just the promotions and the value that the prone can provide for Copa.
And Joe said, let me add to this answer one when I answered matches question a minute a minute ago about if our margins were sustainable and I was talking about how we have evolved as a company. How we have continuously lower unit cost and to be able to have the same success at the past in a lower yield than Marimon I should have added that the frequent flyer contribution which is new which you know your question is very relevant and to that I should also add ancillary revenues, which we had very little a before and today. It's an important contribution to our margins very similar to what we had promised a few years ago.
Now we are still a lot of potential for future.
Future growth.
Got it that's helpful and then pagers since you brought it up you mentioned.
Got it the Max below six at some point I mean, what's the what's the timeframe you think being able to.
Thanks for the question.
So I'm going to I'm going to ask for our relief pitcher picture to help me here, but all in all I was just going to say that that's great.
Great intro for our Investor day in December So when you come to our Investor Day, we can give you plenty of our plans going forward for CASM ex reduction. So there is a great great great that youre going to be able to listen to that here.
Yeah, maybe we can ask our hall of Fame pitcher Mariano to be Preston, who but it but it's in the short term is not is not mid to long term, we're talking short term, but will sure a lot during the investor day.
Yeah, and I again, it's there's a lot of opportunity there and it's very it's a lot of work, but we're already working towards that end.
As Bill mentioned.
Thank you.
Alright.
Thank you. Our next question is from Dan Mckenzie with Buckingham Research.
Yeah, Hey, good morning, guys, Okay Twister arm.
We'll come to Panama.
Question here.
[laughter] are there any signs we need.
We need.
We need to continue boosting tourism and.
Yeah, that's right.
On the revenue side. It seems like there has been a sharp acceleration in business demand into Panama and I'm, just wondering what's driving that I wonder if there's certain industries that are doing well is it new demand as it just existing corporate customers that typically are traveling with more frequency just trying to understand if there is a dynamic in Panama, that's new or you know just kind of might be off the radar of investors here.
No I mean I I.
Yes, I'm not I'm not sure that a.
Not sure Thats exactly whats happening I mean, we do have a new government is since July and they're very high expectations for for the economy growing faster I mean, it's been the fastest growing economy for a number of years in Latin America, but it kind of slowed down a lot year. So so there are a lot of expectations, there's going to be new investment on and.
A so so.
You know and you know so it's a number of things I would say not maybe one particular reason.
Okay very good.
With respect to the development and the faster growth and Panama are there certain.
Indeed sectors that he's he's focusing on that might be driving some of that kind of initial investment today.
Yes, and I'm not sure I can mention one in particular, but remember that Panama. It's also a.
Business destination and safe Haven for for our neighboring countries.
So so there's some of that also sometimes investment moves.
Here from countries that are more challenged Ireland. So there's a little bit of that also but in terms of the economy in general a large copper mine just open a recently a few months ago and that has generated a lot of growth for the economy and international traffic also plus logistics is a very important sector in our economy also.
Very good okay.
On the Max cancellations. This year can you remind us of kind of where you had planned to deploy them.
Where these long haul markets and I guess, where I'm going is just the percent of next flying this year that has gotten cuts, saying peak day revenue versus.
Off peak I'm, just trying to get a sense of how to think about the revenue loss there.
The cost impact you know was addressed earlier, but it seems to me there is a revenue impact here as well and just.
Sort of thinking you know.
I was trying to get a sense of how to to really think about that.
Yeah. So first our first Max we're flying our longest.
Haul routes like San Francisco and Wendell cited it we're in some base of the week and over the year, we're actually wait penalize a win win for that when we're driving just like we're doing now is so we have a revenue loss due to that but also the mag half hour hour for that business class seats, which command a higher revenue. So we're also penalized by by not having that and I know of course more C.
Lower costs, so we're taking a a performance penalty.
A business class calving penalty a number of feet a penalty on a cost penalty on those markets.
<unk> ramping up relative to plan and what's coming on in 2020 that potentially new here.
Yeah, I think you know we mention is that our plan for this year was we increased our ancillary Sterling series by about $20 million and we're well on track to achieve that.
Mostly I'd say they do the changes that we've implemented recently are related to our back fees, we rolled out a second batteries essentially throughout the network as of now so various.
That provided a good boost to touring series and it will carry us into 2020 as well I think you know we'll have a full year effect of the second bag fee and in addition to that we have of course the growth embedded in next year. So we expect it to grow at least by $20 million in and 2020 as well.
And the I.T. is there with respect to.
They are helping to drive incremental ancillary revenues as well.
Absolutely of SCR Big component of it is our merchandising engine that is going to come into in line at the end of this year, we expect to start getting the benefits of that during I must say the latter part of the first quarter of next year would fare families and the like and so that's going to be a really good boost into into our ciliary capabilities as well.
Plus our in house developments, our our in house developed web chicane and mobile check in App. It on and manage my trips and older tools. We are developing tied to the for logic merchandising engine and gives us a lot more control and speed to market is so so that's going to make a big difference also.
Thanks for the time guys.
Hi, there thanks.
Thank you. Our next question is from Bruno Amorim with Goldman Sachs.
Bruno Your line is open.
Okay, and I will move to the next question.
Oh, there double area from you'll be asked your question. Please.
Yes, hi, everyone. This is actually were Jerry we're speaking thanks for the opportunity a very quick question on our side. So could you provide the beans backed off I fr 60 on margin it easier and also how much is operating lease payments this quarter and if it is there any place.
Were caught by providing this figure.
That's it thank you and.
Yeah, Okay, Okay, too I would say, there's really very little impact in AI for 16 in our adoption I fysixteen and by the way, we adopt and for 16 and full retrospective method. So when you're comparing 20 or 19 to our 2018 figures I think in our 20-F from 2018, you have elsewhere table there that shows the comparison.
A there is really very little impact in terms of adoption and everything is in the depreciation and amortization line Theres a portion of the lease payments that are actually going as non operating expenses because the standard mandates that you'd have to.
Break up the lease payment into.
Into an operating partner and operating part so there is really no real place to put an actual lease payment in such into the into the financial statement.
Right now because the standard mandates for it to be the proportion of depreciation and amortization in the early portion into into an interest expense that you that you have to construct out of out of.
The estimated.
Cost of.
That of the of the lease itself.
Yep.
Thank you and if I didn't wait you could provide is triggering any note in their report so when you look at the other companies in the region.
They continue to provide they did use expenses either in the in the <unk> or six get reports or or even in that you do their news release. So I think it's oh for investors that are adjusting for 46 years this could be used to food.
Okay, I'll, we'll consider it but as I mentioned I think that it also depends on what method you use for the adoption and we use the full retrospective method that that when the financials of reproduce comparing 2019 to 2018 also include I for Essex being in 2018, so we're comparing apples to apples and our you know financial so everything has to be effective I fysixteen in what we have but we'll we'll we'll consider the the suggestion and thank you very much for it.
Oh, great. Thank you.
I think what it.
Okay. Thank you and that we have a question from the line of Bruno Amorim with Goldman Goldman Sachs.
Yes, hi, good morning, everyone. So a I have a follow up question on unit revenue rising your guidance actually so if we simply apply seasonality going into the third quarter and fourth quarter using second quarter as I referenced we can easily get to your RASM guidance of 10.8 cents. So are you not expecting any additional improvement in revenue trends going forward are these eat a fair to say that disease, a kind of conservative guidance on the revenue side. Thank you very much.
And I think that on a year over year basis, we are seeing a we're seeing an improvement in year over year or rather than for the second half a year in the double digit range. So yeah. It's it's a it's is pretty pretty significant I think on a year over year basis.
I mean, that's you're comparing Q3 <unk> well yeah.
Yeah. My question is more sequentially you know if you're starting from second quarter and you just apply the usual seasonality going into third quarter and fourth quarter, you can get to your guidance. So you know sequentially Inc. second quarter, you a kind of a normalized level of unit revenue and so going forward, if you're going to just see seasonality playing out or could we eventually see you know an additional improvement.
Yeah, I think again the way that we see it is on a year over year basis and yeah. There is of course, a second half a year as more stronger than than the first half of a year and so there is some seasonality or put in there, but a you know we we like and when you look at it the year over year improvement over the second half is larger than the year over year improvement that you saw in the second quarter.
And I think Bruce and I think it's worth adding that that we're not saying that Latin America is all back to you know its strongest pinpoint than that everything is fixed it theres, they're still weaknesses in the market. So so of course there is a lot of upside is Latin America gets stronger and there's there's a lot of room for that but we're not waiting for that are counting on that you know we are you know a a as I mentioned before lowering costs, increasing ancillary revenues if people doing other things, but yes, we're not saying that that our economy center or unit revenues are back to where they come up to normal and exemplifies Argentina, Argentina, It's actually still when you look at it on a going forward basis is still not it's worse off versus where it was several months ago. So that's a that's an example of it.
No totally hopefully understandable, it's fair to say that you have already made all the adjustments you intended them to match work. So I understand maybe democracy will not improve going forward, but you know from your perspective have you made all the adjustments going through the second quarter or could we see any further adjustments in capacity that could lead to even better units revenue into future.
Well for the rest of the year I see we've pretty much made all the adjustments. So there should be no changes it for the rest of the year. It 2020, we're still working on that and there is still uncertainty in when we're going to get aircraft deliveries. So so we're still working that.
Understood. Thank you very much.
Alright, Thanks, a lot.
Thank you. Our next question is from Krish Patel with Deutsche Bank.
Oh, Hey, guys, it's actually it's Mike Linenberg.
Next.
Well here.
Pedro.
I mean, it's clear that the grounding of the box has been RASM is it for you all that I think pager.
Highlighted the fact that your flagship product obviously not in service. So you're taking 11 dependency there. So maybe it's not as bad and positive as we'd like and then it is clearly a cost benefit as well.
I'll have you come out with a number or maybe you know the way to think about it is what is what is the margin drag of the Max and maybe when I think about sizing I think Americans out there, saying that in November .
The hit to them is 400 million, that's 24 airplanes plus some subsequent deliveries you're roughly one quarter of that so I don't know maybe it's a 100 million hit that's probably a few margin points like how do you think about the margin drag.
As good as this 15 to 17 is that a full year.
Yeah, It's probably 123, maybe four point margin drag to the Max <unk>, where are you on that I mean can you just tell me, where my math is right where its off thank you.
Yeah, we we.
You know, there's there's not there's not a lot of information. We went out we won a share there yet if there is an EPA drag which is probably higher than the margin drag. This of course, a margin drag, but but the reduced capacity in a way to compensate for some of that so so there is a smaller in margin drag that EPA has drag, but but we don't want to you know we're still working our numbers and we don't want to get ahead of that curve.
Now that's that's fair enough I, that's that's a negotiation with Dalai.
I get that.
My [laughter].
Pedro you you mentioned that the capacity.
No one of the things that's been helping you on a unit revenue basis is that in many of your markets you talked about capacity being flat or down and when I think about your markets. In many cases, it's not markets that are taken from Panama, but it's really the markets that overflights, Panama and so my question is are you seeing a discernible improvement in yields were or PRASM RASM in connect markets versus local markets and so is that.
Is that what's been driving the improvement and what you're expecting to see for the second half of 2019 is it more about your connecting markets or are the local markets just as good as the connected markets any color on that Michael.
Yeah, Mike I know this will say here and I'd say, it's both both both connecting and markets to Panama are performing better and improving of course, you know again. There are there are exceptions to this and there are some portion of the network that are still not not improving bought but in general terms. Yes, we are seeing an overall improvement in both markets.
Okay, Great and then just one quick one here. This is a personal request is there any way you can push forward the connection to the schedule to December 2nd a December so.
[laughter].
That's a good one [laughter], we're going to ask you Mike we're going after you make to do a few things for us [laughter] hopefully you agree.
That's probably I'd say, that's a very very valid and good point that will take had notable.
[laughter].
Great job guys.
Thanks.
Thank you and our last question comes from out of course about any adult with Sidoti.
Hi, everyone. Thanks for taking my question I just wanted to see if there's a if you could provide a little bit more color on.
If there was any specific market that drove a second partners unit revenue improvement.
Any specific market lets say you know I think we're seeing good movement in Brazil, Brazil has been.
Doing relatively well I think that I would say that's that's the one where were you know there had been not doing well in prior periods that that is improving and so that's that's I think a good good story, there, but it's not the only one who pays its.
It's.
You answered yes, its most markets most markets with the exception of Argentina, Argentina, but obviously Brasil has maybe a higher year over year, a difference because the comp was much easier and a portion of the network as well I mean, the point of sale.
Brazil is a little higher as well, but so yeah I would say those that's that's the that's a little down there.
Okay. Thank you very much.
Thank you Marcos.
And they're now starting to questions in the queue.
Okay. Thank you all this concludes our earnings call. Thank you for being with US and thank you for your continued support we hope to see you in Panama.
In early December and please have a great day.
Ladies and gentlemen, thank you for your participation that concludes the presentation. You may disconnect have a wonderful day.