Copa Holdings, S.A. (CPA) Q3 2014 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Copa Holdings Third Quarter Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this call is being webcast and recorded on November 20, 2014. Now, I will turn the conference call over to Rafael Arias, Director of Investor Relations. Sir, you may begin.

Thank you very much, Jonathan. And welcome, everyone, to our third quarter earnings call. Joining us today are Pedro Heilbron, CEO of Copa Holdings; and Jose Montero, our Chief Financial Officer. First, Pedro will start with our third quarter highlights, followed by Jose, who will discuss our financial results. Immediately after, we will open up the call for questions from analysts. Copa Holdings' third quarter financial results have been prepared in accordance with International Financial Reporting Standards. In today's call, we will discuss non-IFRS financial measures. A reconciliation of the non-IFRS to IFRS financial measures can be found in our third quarter earnings release, which has been posted on the company's website, copa.com. In addition, our discussion will contain forward-looking statements not limited to historical facts that reflect the company's current beliefs, expectations and 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 that are subject to change. Many of these risks and uncertainties are discussed in our annual report filed with the SEC. Now, I'd like to turn the call over to our CEO, Pedro Heilbron.

Thank you, Rafa. Good morning to all. And thanks -- thank you for participating in our third quarter earnings call. Last night we reported our third quarter results and as always, I want to congratulate our team for their hard work and dedication in delivering another quarter of strong financial and operational results. As you know, we have taken concrete and decisive steps to reduce our Venezuelan currency exposure. At moment, when we are also seeing some demand and yield softness in other markets, particularly in South America, where we have expanded capacity significantly in the past three years. As a result for the third quarter, our revenues decreased 2%, despite 9% capacity growth. Although, passenger traffic grew over 6%, load factors decreased 1.7 percentage point year-over-year and yields almost 8% year-over-year. Unit revenues or RASM were down almost 10% for the quarter or 5.4% when adjusting for a 10% increase in length of haul. On the positive side, unit cost or CASM were 4.1% lower and almost 6% lower ex-fuel. As a result, we delivered a 16.7% operating margin. Operationally, we again delivered world-class results. We’ve consolidated on time performance for the quarter coming in close to 91%. During the third quarter, Copa net consolidated capacity grew 8.7% and international capacity actually grew over 11%. When one considered the capacity we redeployed from the Venezuela into other international markets we already serve, our international capacity excluding Venezuela grew roughly 13%. This capacity was successfully absorbed during July and August high season months, but lagged in September, one of our main off-peak months. For the fourth quarter, we expect unit revenues to continue to be effected by the measures we have implemented in Venezuela, as well as the other factors I mentioned before. However, we also expect benefits from lower unit costs driven by lower fuel prices, as well as our efforts to reduce ex-fuel unit costs. To give you an update on Venezuela, since our previous earnings call, we received [operations] [ph] from the Venezuelan Government to repatriate $24 million, with the majority of that coming in October. This repatriation represented request made during 2014, specifically the months of January, February, March and June, and were liquidated as a currency [indiscernible] exchange rate. We view this as positive especially in the context that we are no longer accumulating bolivars, so this payment gradually reduce our exposure and make our current service to Venezuela viable and sustainable. Shifting to our expansion plans for 2014, during June and July, we added three new destinations, Fort Lauderdale in Florida, Montreal in Canada and Georgetown, Guyana, which are performing as expected. We also increased frequencies to several markets. And for December we have announced new service to Campinas our eighth destination in Brazil, with seven weekly frequencies and we are also initiating two weekly frequencies to Santa Clara in Cuba. With these additions, Copa Airlines will provide service to 69 cities in North, Central, South America and the Caribbean, strengthening its position at the most complete and convenient connecting point for intra-Latin America travel. Turning to the regional economic environment. Growth forecast have been cut back, mainly in South America, due to slower growth in the global economy. According to the IMS, regional GDP is projected to grow about 1.3% this year. Significantly down from prior estimates and previous years. Furthermore, in 2015, the region is expected to perform slightly better with economic growth close to 2%, but significantly lower from prior levels seen this decade. Panama continues to lead the region, with growth in the 6% to 7% range, both in 2014 and 2015. The long-term strength and growth prospects of Panama’s economy should continue to benefit Copa in the coming years. More importantly, international traffic for Latin America continues to grow and according to Boeing’s current market outlook, it is expected to be the second fastest growing region in the world for the next 20 years. That being said, due to the risk of further economic slowdown combined with our large capacity growth experienced in prior years, as well as the redeployment of capacity from Venezuela into existing markets, we have taken a more cautious approach with regards to 2015 capacity expansion. As a result, we will adjust capacity growth for 2015 to mid-to-high single digits. We will look to further optimize our schedules and networks, and continue efforts to further improve unit costs. In terms of our 2015 network expansion, most of the capacity increase will come from the full year effect of capacity added in 2014. However, there are several new destinations we can incorporate that we feel can add unique feet to our network, as well as contribute to our long-term competitive advantage, as a most complete and convenient connecting point for intra-Latin America travel. Last but not least, we are excited to announce that Copa would launch its own loyalty programs starting in July 2015. Our new program will be more tailored to our region and competitive environment, yet we are also offer complete recognition and reciprocity with United’s MileagePlus program and all of Star Alliance. Our new program is a foundational step towards knowing and better serving our most valuable customers, giving us greater flexibility to manage our own programs, promotions and relationships. It will ultimately create significant long-term value for Copa. We will provide further information when we introduce the program details in March of 2015. Until we launch our loyalty program next year, we will continue utilizing MileagePlus as our Frequent Flyer Program. We are very thankful for our partnership with United and MileagePlus as they have contributed to Copa’s growth into a world-class airline. Needless to say, we will continue to have United as our longstanding partner and strategic ally. So to summarize, we believe the fundamentals of our business model remain intact and relevant as ever. We operate in growing and mostly underserved markets, where in most cases point-to-point to service is not an option and markets can only be serve efficiently through [indiscernible]. Our Panama airport has the best geographic location and infrastructure to serve the intra-Latin America market and accommodate our future growth. We have the most complete network for intra-LatAm travel and continue to strength it. We are taking the necessary measures to adjust capacity growth to better reflect current market demand environment. We have competitive unit costs. We continue implementing the necessary initiatives to improve our passengers experience and to delivery of our world-class product. And most importantly, we have a very committed and dedicated team, who day-in and day-out running very competitive and successful airline. Proof of management and our Board’s confidence in the long-term performance of our company, the demand outlook in our region and the resilience of our business model has been yesterday’s approval of a 200 million share repurchase program, which as yesterday’s share price represent approximately 5% of the company’s market cap. So we expect to continue to provide value for our shareholder and our confidence that favor of the opportunities ahead and our ability to continue delivering industry leading results. Thank you. Now, Jose will go over our third quarter results.

Thanks, Pedro, and good morning, everyone. Thanks again for joining us. Let me join Pedro in thanking all of our coworkers for their efforts in running a world-class operation and delivering a very solid third quarter, one in which we grew capacity by 9%, improved ex-fuel unit costs by almost 6% and deliver strong operating margins. Nonetheless, our year-over-year profitability was affected by lower revenues, which were down almost 2%, for the most part related to yield impact of capacity reductions in the Venezuelan market. Reported net earnings for the quarter came in at $66 million, or earnings per share of $1.49, compared to last year's net income of $126 million or earnings per share of $2.84. Excluding a fuel hedge mark-to-market loss of $28.3 million and Venezuelan devaluation of $5.5 million, underlying net income for the quarter came in at $99.8 million or earnings per share of $2.25, compared to last year's third quarter underlying net income of $116.2 million, which excludes a fuel hedge mark-to-market gain of $9.8 million during that period. With respect to traffic, revenue passenger miles increased 6% year-over-year, driving the load factor for the quarter to 76.3%, a 1.7 percentage point decrease compared to last year's third quarter load factor. This combined with 7.7% lower passenger yields led to a 9.9% decrease in unit revenues. However, when adjusting for 10.2% year-over-year increase in length of haul, yields for the quarter decreased 3.2% and unit revenues or RASM decreased by 5.4%. Operating revenues for the quarter came in at $663 million or 2% year-over-year decrease on 9% capacity growth. This was primarily driven by lower yields due to capacity reductions in Venezuela, as well as softness in yields from some South American markets. On the expense side, third quarter operating expenses increased only 4% year-over-year, leading to a 4% decline in cost per available seat mile. Additionally, CASM ex-fuel came in at $0.064 or 5.8% lower for the quarter, mainly from lower sales related expenses and cost reduction efforts. Moving on to operating earnings. Consolidated operating earnings for the quarter came in at $111 million, translates into an operating margin of 16.7%, down year-over-year versus last year’s third quarter operating margin of 21.8%. In terms of non-operating income and expense, third quarter results reflect a net non-operating expense of $39.4 million, consisting mainly of a net interest expense of $3.3 million and a $36.2 million loss in the other net line, mainly due to $28.3 million related to the mark-to-market of fuel hedge contracts and a $5.5 million translation expense related to devaluation of the Venezuelan [indiscernible] rate. This quarter we have also reported an income tax expense of $5.7 million. For full year 2014 and 2015, we expect our income tax rate to be between 11% and 12%. Turning to fuel hedges, we ended the third quarter with hedges for 31% of the projected volume for the fourth quarter using crude oil and jet fuel swaps. 16% of our volume for this period is hedged in jet fuel at an average price of $2.74 per gallon and 15% in crude oil at an average of $89 a barrel. In addition, for 2015 and 2016, we have coverage of approximately 27% and 16%, respectively, mainly in jet fuel and at similar prices and using the same instruments. Although, the recent reduction in fuel prices has resulted in a sizable non-cash mark-to-market charge, we will continue to execute hedges according to our hedging policy. In terms of fleet, during the quarter, we received another three of our eight scheduled aircraft deliveries for the year, which are all Boeing 737-800s. So we ended the quarter with a fleet of 96 aircraft, 52 737-800s, 18 737-700s and 26 Embraer-190s. During the fourth quarter, there were two schedule deliveries, which we already received in October and November, so our plan is to end the year with our current fleet of 98 aircraft, with an average age of approximately six years. Turning now to our balance sheet. We continued to have one of the strongest balance sheets in the industry, as cash, short and long-term investments at the end of the quarter totaled $1.1 billion, which represents more than 41% of last 12 months revenues. Even excluding our cash currently in Venezuela, the company still had over $605 million or 23% of last 12 months revenues in dollar denominated cash. It is important to emphasis that we have not accumulated bolivar as of the third quarter of this year and our balance of bolivar as of October 31st is $499 million, compared to $527 million at the end of the second quarter. In terms of leverage, we still maintain a very favorable position, with the total net debt-to-equity ratio of 0.5 times, one of the strongest balance sheets in the airline industry, even if you exclude our cash in Venezuela. Precisely due to our solid capital structure, we are pleased to announce that yesterday our Board of Directors approved a $250 million share repurchase program. This program is yet another way of returning value to our shareholders, besides our dividend, which continues to be set at a payout ratio of 40% of previous year’s net income. To close, we like to provide some more color regarding our operations in Venezuela going forward. Under current capacity, Venezuela should represent 6% to 7% of our revenues in 2015 and they should be predominantly dollar based. So going forward and under these circumstances, we believe that Venezuela will be a sustainable part of our business. So to recap, demand for air travel in our region continues to expand, albeit at a slower pace. Yields are and will continue to be effective mainly by capacity reductions in Venezuela. We have one of the strongest balance sheets in the industry. And we continue to return incremental value to our shareholders. Turning now to our guidance for 2014. Given our performance, the economic outlook in the region and current trends, we're updating our full year guidance as follows. We’re expecting our capacity growth in terms of ASMs to be at approximately 9.5%. Load factor is expected to come in at plus or minus 77%. We are lowering our revenue guidance to plus or minus $0.13. We’re also lowering our CASM ex fuel guidance to plus or minus $0.066. We are also lowering our effective fuel price assumption for the year, including into plane and net of hedges to approximately $3.05 per gallon. As a result, we can now narrow our full year operating margin guidance to plus or minus 19%. Today, we're also providing preliminary guidance for next year, 2015, based on our operational plan and demand outlook for the year. As such, given our Venezuela related adjustments and our recent growth, we expect to adjust our operating plan to the overall economic trends in the region. This has also resulted in lower operating margin guidance for the year. ASMs are expected to grow plus or minus 7%. Load factor is expected in the range of 76%. RASM is estimated to come in at plus or minus $0.122. We expect CASM ex fuel to come in at plus or minus $0.066. And with respect to fuel, we’re assuming for the year and effective price per gallon including into plane and net of hedges of approximately $2.80. As a result, we expect operating margins to be in the range of 15% to 17%. Thank you. And with that, I’ll turn it over to Pedro for closing remarks.

Thank you, Jose. Now we'll open up the call for some questions.

[Operator Instructions] Our first question comes from the line of Savi Syth from Raymond James. Your question please.

Hey good morning everyone. Just on the stage length, it was up quite a bit this quarter. I was thinking when it should be up at a similar amount and guessing that’s driven by capacity customs in Venezuela. And if it is going to be up as much, going into over the few quarters, I just wondered why may be unit cost is going to be down more in 2015?

Savi, I got the question right. You are asking about our stage length going up for the quarter. So we indeed do -- this is related to both the shift in capacity that we’ve made in Venezuela but also due to the growth, kind of the general growth that we have in our network. For next year, stage length is also going to grow somewhat and the way that we see it with our stage length, I mean, with our CASM ex fuel for next year is $0.066 at this time.

So you are not saying any benefit from the increases in stage length?

I think we’re seeing -- I think we’re basically seeing as it is with a $0.066. I think we’re implementing lot of cost initiatives during next year. And as it was come in line, we will -- if anything adjusted. But for now, we’re seeing $0.066. Thanks.

And this is Pedro, Savi, it always inflationary pressure that go against the efficiencies of a higher stage length. So we’re balancing that out also.

Got it. And then along those cost questioning line, are there implications with implementing the loyalty program, any cost that go along with that?

That is correct. So that is in our -- embedded in our guidance of course and the $0.066, Jose just mentioned. So the new frequent flyer program is going to add value to the company. It’s going to improve our bottomline. But that’s not going to happen in 2015. 2015 is going to be mostly a negative in terms of the cost. They could have been incorporated in our structure. So by 2016, we should see our benefit.

Yeah. And Sai, just to add to that, as Pedro mentioned this is embedded into our ex-fuel CASM guidance. And value of that, first, probably in the cost side is going to about $20 million?

Okay. Got it. Helpful. All right, I’ll get back on the queue. Thank you.

.:

You want the star one again.

Let’s listen to.

Bernardo, your line is open.

Thank you. Jose, wondering if you could share with us thus some of the performance in terms of demand and yields excluding Venezuela during the quarter?

Ex Venezuela what you are asking so. We’ve seen some yield weaken it and slowness in demand growth. Mainly in South America, again besides what’s directly related o the reduction in capacity in Venezuela. I would say that mostly in Argentina but also in Chile and Peru. On the other hand, Brazil has been okay I would say so far. Demand in Brazil has been a holding on a slight subnet in yields but actually less than in the other market that I just mentioned.

Okay. Perfect. And I was wondering if you guys could give us more color on your expectations for your frequent flyer program or just thinking you probably partnering with already expert company of the business and how much investment will be needed?

Well, there is a problem that we’re building ourselves. We’ve been working at it for some time. And as I mentioned earlier, from the cost side next year, it will be around $20 million for the rollout of program in the first year.

Right. And there will be significant benefit or -- at least that’s what we expect but again that would be 2016 and beyond.

Okay. Perfect. And I guess, could you comment on what will be impact on demand. What will be once the agreement with mileage plus and meaning how much of ‘11 yields come from this segment?

We do not expect an impact in demand. Our -- first we are going to stay with minus plus as our one program on end of June of 2015 and secondly, we will keep almost full reciprocity with a minus plus and also with the other Star Alliance carriers. So we are not expecting, at least not a meaningful or significant impact to demand. It could even be positive.

Okay. Perfect. And lastly, you were mentioning in your jet fuel and oil prices that you hedges for first Q and I just wanted to make sure you mention $273 for jet fuel and an $89 for oil, right, that’s for 4Q?

Yes. Correct.

And could you share the numbers for 2015 and on to 2016?

Yeah. For 2015, essentially, it’s about $274 and most of our hedging for the out years for 2015 and 2016 is at around $274 and most of it is in jet fuel.

Okay. Perfect. So, I mean, given the current prices that we are watching on jet fuel, what would you say will be the impact or the hedge loss for next quarter if its current prices remain?

Well, the way that we look at is we have about a third of our volume hedge and I think for every way that we see it actually is part of that for every $1 change in the price of oil and in crude price of oil per barrel, that equates to about a $5 million benefit to ourselves including the effect of the hedge. So it’s a net positive for us as fuel fluctuates downward.

Okay. Perfect. Thanks a lot.

Thank you. Our next question comes from the line of Duane Pfennigwerth from Evercore ISI. Your question, please.

Hey guys. Thanks for taking my question. I wanted to ask you about the implied revenue from your guidance, basically how literally we should be taking that? Because it looks like it implied yields in the fourth quarter down about 15%, versus the down 8% that you just did. Is that what you are seeing or should we be interpreting this guidance differently?

You are talking about 2014 guidance fourth quarter?

Yeah. The fourth quarter because on our load factor and your RASM guidance it looks like it implies yields down about 15%, 1-5, in the fourth quarter and I just want to check.. Is that actually what you are seeing or is that…?

Yeah. That’s correct. We are seeing a drop of yields of around 10% to 13%.

Okay. So perhaps the RASM decline in the fourth quarter is largely than it was in the third quarter.

Yeah. You can assume that.

Okay. Maybe just some color on why and then just as a follow-up, I wanted to ask you about the shape of that recovery in 2015. To get to the down 6% RASM, is it something similar looking in the first half of the year to what we've seen in the second half of ’14? And assuming sort of positive RASM in the back half of ’15, or any help you can give us about the shape of that recovery would be helpful?

Yeah. So, Duane, I will start. Pedro here and then I will let Jose give you more specific information. In first half, we were kind of like a wide and it’s been -- we were I guess mostly successful in replacing the Venezuela capacity during the high season months of July and August. But had a much tougher time in September replacing that capacity with older, let’s say strong yields in market. So we saw that in September. September, we were not able to replace that capacity in September. And in the fourth quarter, we are also going to have some issues. That’s embedded in our guidance, trying to replace all that Venezuela capacity, plus we also have done pretty much to a dollar rise. We have been able to shift our sales to dollar demand albeit from this very high yield Bolivar demand. So that is also a greater impact from what we were expecting at first. In 2015, what we are seeing right now is that will continue. We are not sure exactly when that recuperation will begin. And Jose, if you want to add to that?

Historically in the second half, I mean, costs being equal is usually better than the first half. But in terms of 2015, I would say it’s a little bit too early to tell. We had limited disability into the recovery at this stage. But we probably would see some better performance during the second half of 2015. Also given that -- then our, all the action plans we have been performing over the last several months are going to be coming to fruition.

And I would add to that obviously what I mentioned before that we are seeing some softness or slowness in other South American markets, that is also the markets we are actually up or we are actually very strong than that would help us make up for the Venezuela reductions but that’s not being the case. So we are dealing with both things even though it’s mostly a Venezuela issue.

Okay. I appreciate that. And then just lastly, I wonder, Jose, if you could just tell us year-to-date, or for 2014 how much Venezuela revenue has been and what the Bolivar portion of that has been and again, I appreciate you taking the questions?

For first part of this year, it’s been about between 15% of our revenues. And what is interesting to mention is that over the last couple of months, the actual portion of our revenues in Venezuela and Bolivia have actually come down. We’ve been pretty successful shifting the demand to a dollar-based demand and now about, I would say between two-thirds and three-fourths of the demand is dollar-based demand. So, I think that is an very important thing to mention that we’ve been successful at stopping the accumulation of Bolivars and shifting the natural dollar based demand.

Thank you.

For 2015, Venezuela revenues are going to be plus or minus 6% of the total. And again, 80% or 75% of that is dollar demand.

Thank you.

Thank you. Our next question comes from the line of Michael Linenberg from Deutsche Bank. Your question please.

Good morning. This is actually Cathy O'Brien filling in for Mike. I was just wondering how are the routes that you reallocated capacity to from Venezuela ramping up versus your historical average. And do you any sense in the forward bookings, how this looked to be ramping up going forward? And just I understand there has been a little bit of an demand impact in the region, but do you any sense of how long it might take you to ramp up to full run rate profitability on those routes?

It’s hard to tell right now. It’s really hard to tell. We only have visibility three months into the future. What’s beyond that is really hard to forecast. Supposedly, Latin America is going to be doing a little bit better next year than this year, but again, it’s still early. What we saw in the third quarter and it’s third and maybe fourth quarter also, we saw higher capacity growth than in the previous, let’s say, six quarter in overall capacity coming into the markets of Latin America. That growth was mostly from U.S. to the Caribbean, it grew faster, also some from U.S. and Mexico to Central and South America, but it was mostly U.S. to Caribbean. U.S. to Caribbean doesn’t really affect us. A U.S. and Mexico to Central and South America does compete with us. So we saw faster growth in the third quarter, faster capacity growth. So that kind of adds to the equation. We are as we have guided to being more cautious with our 2015 capacity and how we are looking 2015 capacity. Most of our growth next year is going to come from the full year effect of what we put in place in 2014.

Okay. And then, so just on that competitive capacity front, do you see that kind of a betting as we move into year end and next year? Or do you think it’s going to be at about the same high level? And is that what you’re baking into your revenue forecast?

What we see from the other Latin American carriers is capacity discipline in terms of aircraft on order and the plan they have announced. So, so far what we’ve seen from our peers in the region is what I would call discipline, a lot of discipline. From the U.S., it’s hard to predict, but I guess our guidance is how we see things today and in the past. I should say that we’ve been pretty accurate with our preliminary guidance. We are not expecting that to be much this into year, but again it’s very early still.

Okay. Now if I could squeeze one more quick one in. What is your delivery schedule look like next year compared to the aircraft that you have coming up towards the end of their leases? There is just 7% capacity forecast for next year [indiscernible] flat fleet or potentially shrink or grow that fleet?

Okay. So right now, we have 11 deliveries in our plan and we also have five lease returns, so we have a net of six aircraft, but we are working on initiatives which could lead to between two or zero net additional aircraft in 2015. And again, the 7% comes mostly from the full year effect of what’s in place this year. We don’t think it’s going to be less than that. It could be slightly higher if we implement certain utilization improvements. And we are growing engage, but it’s mostly full year effect. And again, with the initiatives we are putting in place, we are probably only going to grow between two and zero net aircraft, but we have not published that new plan yet. We will do that once it’s settled and known.

And just to add to that, but that is -- of course our guidance reflects the way that we see our capacity, our overall capacity growing next year.

Okay. So that 7% implies that you only would maybe have zero to plus two net aircraft next year or you’re not…

Yes.

Okay. All right. Thank you for all the time.

Thanks.

Thank you. Our next question comes from the line of Hunter Keay from Wolfe Research. Your question please.

Thanks, everybody. So I wonder if we can sort of parse back little bit the RASM guide in the fourth quarter, as it relates to the yield and load factors. Can you remind us how Copa fuel surcharges and how much of the decline in RASM in the fourth quarter is from just weaker underlying demand versus just fuel surcharges coming off? And just again at a bigger picture, how you guys generally move your fares along with fuel?

Well, it’s mostly related the way that we see it to mostly to Venezuela in the fourth quarter on a year-over-year basis, but as we mentioned earlier, there is some little bit of a slowdown in similar South American markets, mainly Argentina and couple other South American markets, but it’s mostly related to that more than necessarily an impact related to fuel at this stage.

And to follow up on some -- Pedro you said just a minute ago about you don’t have visibility much more than three months. I understand that, most airlines don’t. But given the dynamic nature of the business right now, why give a 2015 RASM guide? I know that’s your custom and you do that. And for sure, we greatly appreciate you guys doing something like that. But we really do, it takes guts, but it’s very hard for you guys to forecast demand was in months out in a good operating environment. Did you guys think about not giving this RASM guide for next year and why should we model to it if you can’t do demand more than three months out?

Well, this is one earnings call where we felt that we had to give you that guidance. And 80% of it comes from the impact of Venezuela, which we can predict now that we have shifted demand to dollars between 75% and 80% of demand and that could be even higher. So we shifted demand to dollars. So we can pretty well project out for the year Venezuela. And again that’s most of the impact. Yet the other 20%, it’s hard to forecast at this point. But again, we’ve done it before and we felt at this time we could not do it.

Yes. I appreciate that, Pedro. And thank you for doing it by the way. And one more quick follow-up on the buyback. Should we think about -- how should we think about just bracketing the timeline on this? And you guys just need to be opportunistic and that’s great to see, but do you expect to have it done by the end of next year just as this authorization expires? Just any kind of color would be great. Thank you again.

Well, before Jose answers, I must say I think when I was doing my part, I said 200 instead of 250, so I just want to creep in the record, but it’s 250 obviously as Jose mentioned during his part.

So now $250 million buyback program, our Board did not put a time limit on it, on its approval, so we’ll start executing the program. It’s an open market program. And of course, this is in addition to our 40% dividend payout. So it’s certainly we believe a prudent management on our Board are very keen on returning value to our shareholders.

Thanks, guys.

Thank you. Our next question comes from the line of Daniel McKenzie from Buckingham Research. Your question please.

Hey, good morning, guys. Thanks for the time here. Couple of questions. Wondering if you can talk a little bit more about Argentina. The country is reportedly short of dollars. The economy is in pretty rough shape. Does it make sense to adjust capacity there if that’s the source of yield weakness? It’s unclear to me if that improves. And then separately, related to that, if you can talk about the repatriation of money from Argentina, just given some of the news, the media reports about the country having a hard time with dollars?

Okay. This is Pedro. First, well, I must say that our freight in Argentina doing well. We have good load factors And from that standpoint, we see no reason for reducing capacity at the market where we’ve served for a long time right now and we have a following and again our load factors are doing well. We have seen yield softness and there’s been higher taxes so we’ve had to lower prices to demand and to keep our leisure products traffic work with our wholesalers, et cetera. But load factors are still healthy and freights are still doing well.

And in terms of repatriation, Dan, the -- we’re repatriating funds out of Argentina on a daily basis and we don’t really carry a significant balance of Argentine pesos at this time.

Okay. Very good. And then just going back to Investor Day commentary and the outlook for Venezuela, the impact margins by 100 basis points this year and next, I think a number of investors were looking for a 17% to 19% margin guidance. I'm just trying to back into the 200 basis point differential. And just wondering if you can help reconcile this from a slightly different angle. And I guess, what I'm trying to preempt in this question here is investors that are concerned that there's serious fundamental deteriorate in the business. And it looks like part of that deterioration, the guide is economic deterioration just in the region, but I'm also wondering what part of the margin hit is from underutilization of aircraft, just given the slower growth? So fleet count up potentially well here in 2014. Headcount is up. The capacity essentially flat lining, which of course puts pressure on non-field CASM versus what it otherwise would be -- is there. To what extent, is that something that’s a hit to the margin next year?

A few things. In the last earnings call, I think he was Jose answering that question said that we’re expecting the operating margin impact of Venezuela for the rest of the year should be 3 percentage points. So that was higher than we had said during the earnings call and that was related to additional cost and a more dollar sales that ended up being higher than those 3 percentage points. It was actually higher than that in reality. I guess we underestimated the impact and we also underestimated our ability to shift that capacity to healthy yield, other healthy yield markets, even if not as high. In terms of our ex-fuel unit cost, we’ve actually being bringing them down. So we feel we have that under control. And even though we’re guiding to a similar ex-fuel unit costs next year, that makes up also for additional frequent flier, cost inflation and all other things. So even keeping them flat, it’s an achievement under loss conditions and again means that we have them under control.

And the only thing I would mention, Dan, is that I think that from what we’ve seen we should expect our capital utilization, you mentioned to go actually up next year as well. So we should expect efficiencies there.

Okay. Very good. Thanks, guys.

Thank you. Our next question comes from the line of Stephen Trent from Citi. Your question please.

Hi, good morning, guys. Thanks for taking the questions. This is Kevin Kaznica filling in for Stephen. I guess, just really high level, once you guys have may jumbled and somewhat talked down your Columbia’s competitive threat and then we see months later that Jose actually joined you in Columbia on the carriers. Supposedly there is plans to separate operations in Panama. I mean, is this part of the competitive threat that you're seeing and is that kind of baked in 2015 guidance? And are there others specific regions that are seeing as to competition?

Well, in our 2015 guidance, we have embedded just the normal competition we’re used to. Maybe a little bit more than normal combined with the slowness in the economies of the region, which is kind of what we’ve seen in the second half of the year. So we’re projecting the second half of this year to continue in 2015. Again, a little bit higher growth in capacity versus previous quarters and slower economic growth. So there two things that are embedded in our 2015 guidance and that’s what why we’re seeing right now and that’s what we should expect.

Great. And just to kind of circle back to your new loyalty program, I know you talked about the cost in 2015 and I don’t even know if you can answer this. But could you estimate the number of repeat customers who might join, especially some few said there is going to be rush capacity with MileagePlus and the Star Alliance numbers? And do you think you might have to offer in special incentives in order to in place customers to join, so maybe some more incremental cost just to get people to join the program?

So those details are not available yet. We’ll make more information available in March. But I think what’s important is that either way it’s occurring minus, plus Copa members joins the new program or stays where they are. They will still earn miles when the fly. So it should not have a significant effect on demand. But obviously, the more people that transition to a new program, they better for the program and for the value it should add to Copa. So you can assume that we’re going to won incentive like that.

Okay. That’s very helpful. And then, was there any unusual effect behind your 3Q taxes coming in so low? And I think you guided toward a lower 2014 tax level as well?

Yeah. It’s Jose here. This is just timing of tax payments and deferred taxes. The full year tax expected rate, as I mentioned, during my intervention before is between 11% and 12%, both for this year 2014 and for 2015.

Great. And then finally just kind of come back to Argentina. I’ve had some -- what I’m saying that the situation there is kind of somewhat like Venezuela 2.0 as the current average trenches and the competitor pointed out at that market. And I think your current exposure top line to Argentina is like 8%. And I don’t -- and it sound like you guys did trying to reduce any capacity of those markets?

We are keeping capacity at it. Yields were down, so if any market is less profitable than before. But if there are market with high load factors and good profitability, we see no reason right now no need to reduce capacity but obviously, as we know sometimes things change from one day to that other. But that’s not where we’ve seen or what we’re expecting right now as we speak.

So, we’re of course full and did very good closely.

Okay. Great. Thank you very much for the color. And thank you for taking the call.

Thank you. [Operator Instructions] Our next question comes from the line of Bob McAdoo from Imperial Capital. Your question please.

Hi, guys. Just a question on the loyalty program. Can you give us a sense of what percent of your customers are actually interline customers who would be interlining back up through the Continental/United System versus number of passenger that you carry in and out of Panama who don’t really touch the United System. Could you get a sense of your customer base total but like, what are the kind of people who would likely, they are in the United Program because that United what you had, but who have really more of an interest in intra Latin American kind of program because that’s really where they got to your business seems to be?

So, Bob, this is Pedro, when we prepare for this calls we tried to anticipate all the questions. And there is always someone that comes down with a question that we did not anticipate, and that we’re not ready for. So I cannot give you a detailed answer, but what I can tell you is that the most of our work MileagePlus passengers today. Our MileagePlus/Copa passengers. So people have accumulated most of their miles in Copa flights.

Yeah that what I was trying to think. As I sit and look at your network it seems like the majority of the people are not people who are going to go up to Houston or whatever. The majority of people you carry are going to back and forth between the Caribbean and South America whatever. And they’re in MileagePlus because you are in MileagePlus but there isn’t any particular affinity that they have with United per se and that wouldn’t -- that you would guess that the majority of your customers would be -- if there is some thing that’s tied to their world there would be no reason for them to really necessarily hang-on to United, especially I assume when you talk about reciprocity, they’ll still be able to -- if they earn miles on you, they can burn those miles by going somewhere on the United System.

Correct.

For the world, is that correct?

So you are correct, you are 100% correct.

-- And I read something that said -- there is a note that said something about that yours is going to be mileage based rather than dollar based, is that correct?

That is correct, yes.

Okay. All right. And have you done some recent padding of the patterns, in terms of reactions and terms of just squeezing and rearranging stuff in terms of, you talk about things they are working, obviously Venezuela is one of them. Have you done some recent cutting in Columbia? Somewhere I got that impression. is that correct? That there is some Columbian market that you pulled out of recently, is that lately reduced?

Well, certainly you are in the year, late last year that we actually reduced our exposure to the Columbian market, domestic market, that was done several months ago.

But nothing new, and as I was trying to figure out, it looked like lot of some new capacity and may be this is much or maybe the data that was shown that was not current but…?

Actually, Bob. I would say also that during the second quarter we pulled out some capacity out of again the domestic Columbian market. So yeah there was some of that came in during the latter part of first half of this year.

And in terms of reallocating airplanes or whatever -- did you say that Brazil is one of these places that seem to be maybe some place that has accepted some airplanes and doing kind of okay, or where else is there -- when did you put in a second Las Vegas flight somebody mention that to me too?

Yeah, I was trying at my memory. That was end of that year.

Yeah that’s the year.

Jose, do you know the exact year?

Okay. I know it’s its got out of date stay.

So we’ve taken capacity from domestic Columbia put it in international markets, we’ve taken capacity from Venezuela. Our competitors have taken some capacity out of Venezuela also and put it in other international markets in the region. So what we are doing right now is that we are looking at our whole network. And we are going to be moving things around. Again next we are going to grow may be two or no or 0 or none in terms of new aircraft. And we’ll get to a 7% or better with the full year effect of what we’ve done this year. But more important what we are doing is, is looking at our whole network and looking to optimize our network and shift capacity from where there is better demand away from where capacity was not needed and not doing so well. So we are actively engaged in accomplishing that.

As in term with -- one final thing, as in terms of all the other capacity, everybody else has dragged away from Venezuela. Are you seeing much -- I assume that when you go through all those things, you seem to be one of the larger carriers still in Venezuela in terms of opportunities for those people who really do have to get to Venezuela. It would appear given the number of people who had pulled back capacity, the point of view of servicing business customers that you have a -- that you probably still have a pretty good business there. And is it -- can we think of that as a current Venezuela, dollar based Venezuela, is profitable and is it, in terms of margins, would it be kind of roughly average or what everything else is because of the pull backs that other guys have made or how should we think about how Venezuela is now?

It’s steal us from market. And yeah we are probably the largest international carrier in terms of capacity. And it’s a strong market. It’s a good market with mainly very high load factor. So when load factors are high, you can revenue management of those load factors. We are selling mostly dollar demand and but with healthy load factors.

Okay. Thank you very much.

Thanks.

Thank you. Our next question is a follow-up question form the line of Savi Syth from Raymond James, your question please.

Well, thanks Pedro and Jose. There is a just a bit of a higher level question. So if you look at non-Venezuela your rest of system in 2013, it appeared that margins there were much below, maybe you are on a continued first one level than kind of the historical percentage point, 17% to 20% level that you’re seeing in the system? And may be part of that was due to a lot of capacity being added in 2012 and 2013. What -- it has something changed in the new markets have added in 2012 and ‘13 that makes them lower margin than historical of something in the landscape that has changed that makes you lower than historical? Well if you just kind of go into the cyclical Latin America softness and we should see returns of high margin?|

Well, I understand your question. What I could say maybe big picture high level is that the stronger than normal Venezuela business spread into the whole network and a permitted capacity growth in other markets to be maybe more profitable than would have normally be in a normal pullout. So if you look at the last three years or four years, we grew at a very fast pace and our profits grew at the same time and that’s not very normal. So Venezuela was important in achieving that and now we have to rebuild it all. So we need -- and that’s why we are putting so much emphasis in optimizing our network, including capacity where it makes more sense now that there is a very high yield fuel feed from Venezuela. So, I think it’s going to be a profit that will probably take us a few years and especially considering that two years ago, every market in Latin America was very strong, was booming, was growing double-digits. So now that has slow down, there is still growth. I mean, no, the market are not going back. I mean, there is still positive growth but it’s not as fast and a lot of other capacity has come in. So we think it’s going to take a couple of years to optimize the network for the waters to find their kind of level and start rebuilding those margins.

Okay. And when you say rebuild it here you are really talking about slowing growth here and $3 billion in operating topline?

I will say partially, but also in finding markets that maximize our profitability. So we’re in that process of adjusting capacity specific markets and managing the network our way.

Got it. And then one last question. You do talk about more USD tickets versus bolivar tickets, how does the USD-based ticket those from your perspective compared to Venezuela Bolivar-based tickets, what kind of a difference is there on the unit revenue perspective?

Well. I would say that there is certainly a reduction in yields in the U.S. dollar demand. The one thing that I would say is that our Bolivar, U.S. dollar or our Venezuela U.S. dollar demand and it’s kind of yield is still higher than other parts of the network. So we do have, we believe still a maintenance of good yields in the Venezuela market.

Okay. Thanks, Pedro. Thanks Jose.

Thank you. Our next question is a follow-up from the line of Hunter Keay from Wolfe Research. Your question please.

I appreciate you taking the follow-up here. Just two. As it relates to loyalty program, Pedro, remind me if this is correct, but don’t you guys have sort of hodgepodge agreement with like nine different banks, as it relates to co-branded credit cards. And does the migration do a single to your own mileage program, allow you to maybe sort of consolidate that up? And is that a bigger opportunity longer term for you guys to do something that we’ve seen from some of the U.S. airlines in terms of sort of signing bonus and big affinity program regarding advanced purchase of miles? How does that tie into your co-branded credit card agreement and is that a longer term catalyst?

So what are you seeing is correct and it will became an important part of our program. But it won’t -- all have been right away, because those banks have their own contracts, with their own termination clauses and timings. So that will happen gradually in the next few years.

Got you. Okay. Thank you. And one more philosophical question as it relates to fuel hedging. I don’t know if this is for Jose or Pedro, but I’m wondering if it makes sense to, the way you hedge fuel given the fact that Latin American economies are so exposed to commodity environments. It is probably a coincidence that as commodity prices are declining, Latin American economies are weakening. So, a, does it makes sense to hedge it all and b, does it make sense to hedge against fuel in the sense that you should protect yourself from lower oil prices not higher oil prices?

I think that question is way too philosophical for today.

I mean, it’s true, right. I mean think about it. I mean, you guys are getting kind of hammered a little bit on the hedges. You are not the only ones. But maybe we can take it rather than hedging against lower fuel prices, let’s maybe talk about the Class A hedging fuel at all? How about that?

That’s an interesting point. I mean, for now, I mean, we’re following what we have, I mean, we have a certain volumes already set for 2015. And for now, we’re just -- the market, as you know, the fuel market right now has been volatile over the last month. So, we are just paying close attention and looking for opportunities if they come out and following up our policy.

Okay. Thanks guys. Appreciate it.

Thank you. Our next question is the final question due the time constraints. It comes from the line of Daniel McKenzie from Buckingham Research. Your question please. Dan, you may have your phone on mute. Daniel McKenzie, we’re not hearing you.

Could you hear me?

We can hear you now.

Sorry about that. Thanks guys for taking the final question here. It’s really an educative question. One of the questions I get from investors is why sell 25 to even one-third of the tickets in Bolivars, and I understand it’s a legal to sell tickets in Venezuela, in U.S. dollar, so you have to sell in Bolivar. But I guess, I’m -- one of the concerns I get from investors frequently is that there is going to have to be a write-off here because they’re looking at other industries. And so I guess, I’m wondering, from your perspective, does it make sense to trim capacity by that 25% to 33%. And just sell U.S. 100% U.S. dollar-based tickets and eventually burn-up the Bolivars in that way. I’m just wondering if you can help investors think about that.

Okay. This is Pedro. So we’ve shifted as we’ve mentioned a share to demand outside of Venezuela which is where you can buy in U.S. dollar. In Venezuela, we have to sell in local currency. And we also have what will be local currency expense, expenses which we’re occurring with our local sales. I understand what some investor are saying and maybe future is set and done, but we’re operating in the Venezuelan market and we need to have some local, some capacity to be available for local demand. We’re still reducing our outstanding balance. Maybe we could reduce it at a higher rate. But it’s kind of where we need to do to continue in the market, to serve that market, to serve the local demands. We need to find that balance and we think we’re there. But I understand what are you saying, maybe just not that easy to do.

Very good. Thanks so much for the time, you guys.

Thanks Dan.

Thank you. This does conclude the question-and-answer session of today’s program. I would like to hand the program back to Pedro Heilbron for closing comments.

Hey. Thank you. Thank you all. This concludes our third quarter earnings call. Thank you for being with us. And thank you for your continued support. We will see you next time. Have a great day and a great weekend.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.