Copa Holdings, S.A. (CPA) Q3 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to Copa Holdings Third Quarter Earnings Call. [Operator Instructions] As a reminder, this call is being webcast and recorded on November 15, 2018. Now I'll turn the conference over to Raul Pascual, Director of Investor Relations. Sir, you may begin.

Thank you, Brian, and welcome everyone to our third quarter earnings call. Joining us today are Pedro Heilbron, CEO of Copa Holdings; and Jose Montero, our CFO. First, Pedro will start with our third quarter highlights, followed by Jose, who will discuss our financial results. Immediately after, we'll open up the call for questions from analysts. Copa Holdings financial reports 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 earnings release, which have been posted on the company's website, copa.com. Our discussion will contain certain forward-looking statements not limited to historical facts that reflects the company's current beliefs, expectations and 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 are discussed in our annual reports filed with the SEC. Now I'd like to turn the call over to our CEO, Mr. Pedro Heilbron.

Thank you, Raul. Good morning to all and thanks for participating in our third quarter earnings call. First, I want to recognize all of our co-workers for their efforts during the quarter. Their ongoing dedication and commitment keeps us at the forefront of Latin American aviation. As you can see in our third quarter release, we confronted a number of challenges during the quarter. On the expense side, we had more than $48 million of additional cost due to higher fuel prices and on the revenue front, we faced a deteriorating demand environment mainly driven by economic and currency weakness in Brazil and Argentina. This is not exclusive to Copa as International IATA BSP sales for the entire industry in these two markets measured in US dollars were down about 25% and 40% respectively for the quarter. Most of the rest of our network was not affected year-over-year. However, we were not able to compensate for the additional fuel expense. We firmly believe this is a temporary situation and are confident in the long-term value and potential of this market, the strength of our business model, and our ability to return to higher margin. Among the main highlights for the quarter, passenger traffic grew 4.8% year-over-year on a capacity growth of 6.6%. This resulted in an 84.3% load factor, 1.4 percentage points lower year-over-year. Yields came in at $0.116 or 3.3% lower than in the third quarter of 2017. Unit revenues or RASM decreased 4.2% year-over-year to $0.101. On the cost side, CASM came in at $0.09, 4.3% higher year-over-year due to higher fuel costs; however, ex-fuel unit costs, came in at $0.06 or 5.5% lower year-over-year due to the timing of certain events and cost reduction efforts. The resulting operating margin came in at 11%. On the operational front, Copa Holdings delivered an on-time performance of 88.3% and a completion factor of 99.8%, again amongst the best in the world. Turning now to the rest of 2018 and 2019. Demand weakness in Brazil and Argentina continues to put significant pressure on our unit revenues, also affecting other parts of our network such as the Caribbean and North America. As a result, we're adjusting our guidance to reflect our performance in the third quarter as well as a weaker fourth quarter forecast. We're also adjusting our capacity in the affected markets especially during low season. For the fourth quarter of 2018, we're reducing our Brazil capacity year-over-year by about 10% and reducing our growth in Argentina from 20% to about 10%. In the past few weeks we have seen some encouraging signs, decreasing oil prices and stability in both the Brazilian real and Argentinian peso. There also seems to be more optimism regarding the economic prospects for both countries. Well, there is still a long way to go and at this point, we do not want to be too optimistic. From what we can see right now, we will still be dealing with a tough unit revenue environment at least into the first quarter of 2019. On a more positive note, we continue making progress on many fronts. As you have seen in our results, our unit costs excluding fuel are as low as they have ever been and we continue looking for further saving opportunity. With the introduction of the 737 MAX9, we also launched our new business class product Dreams for a longer flight, which should help us increase yields in the front of the cabin in those routes. We continue to make progress in ancillary revenues and loyalty programs including seat assignment, second bag fees in selected markets, and the selling of miles and upgrades among others. We also have made significant progress in deploying new technology tools. As of last month, our call center agents are using the new passenger service interface, which among other benefits allows us to sell ancillary products for the first time through this channel. We expect this will enhance and accelerate our ancillary revenue performance. By the end of the year, we'll also have this capability in at least four airports and expect to have full deployment in 2019. In summary, we continue working to strengthen our business model and further our ability to produce premium margins. Turning now to our fleet. After receiving our last two 737-800s and returning a leased Embraer-190 in the first half of the year, we began taking delivery of our first three 737 MAX9s; one in August, one in October, and another in November. We expect to receive two more during the next few weeks to end the year with a consolidated fleet of 106 aircraft. As per our previously published fleet plan, we expect to receive eight Boeing 737 MAX9s in 2019. However, we're also announcing that after a review of our demand expectation and long-term fleet and network plan, we have decided to further reduce our 100-speed aircraft fleet and thus we expect to retire up to six Embraer-190s, five of which will leave next year. So, we now expect to end 2019 with 109 aircraft, three more than 2018. This decision leads to slower 2019 growth, but more importantly, higher long-term efficiencies and structurally lower unit costs leading to higher profit. Jose will give more details on this transaction. Regarding our network, in July we started three new flights; Fortaleza and Salvador, our eighth and ninth destinations in Brazil and Bridgetown, Barbados, our 16th destination in the Caribbean. We also announced two new destinations for the end of the year, Puerto Vallarta in Mexico and Salta in Argentina, both starting in December. Although the timing may not be ideal, we believe in the long-term value of these additions. By the end of the year, Copa will provide service to 80 destinations in 32 countries in North, Central, South America, and the Caribbean; by far the most complete and efficient network for intra-America travel. On the operational front, we continue delivering industry-leading results. We're very proud of the efforts that our more than 9,000 co-workers put in day after day to place us among the most on-time airlines in the world. Finally, I'm glad to report that Wingo although a very small 2% of our revenues continues to do better than expected both operationally and financially. In fact during 2019, we will be swapping their four 737-700s for four 737-800s, which will further lower their unit costs and increase profitability. Furthermore, we expect to transfer a fifth 737-800 to the Wingo fleet and most likely base it in Panama. To summarize, we expect lower unit revenues for the rest of the year and into the first part of 2019 based mostly on yield softness in Brazil and Argentina. We're being proactive and taking steps to moderate our growth to accommodate these market conditions. Our team continues to deliver world-class operational results, including one of the world's highest on-time performance. We continue delivering efficiencies and savings, which have further lowered our industry-leading unit costs. We also continue focusing on revenue opportunities, including ancillary initiatives that are aimed at strengthening our results. Lastly, we are as confident as ever in our business model and our financial strength. Even during a challenging year, we continued delivering a great product, leading unit costs, and double-digit margins making us the best position to consistently deliver industry leading results especially once the market conditions in our region normalize. Now I'll turn it over to Jose, who will go over our financial results in more detail.

Thank you, Pedro. Good morning, everyone, and thanks for joining us. As always, I want to start by acknowledging our great corporate team for all their achievements during a challenging quarter. During the third quarter, we grew capacity by 6.6% year-over-year while revenue passenger miles increased 4.8% year-over-year, which resulted in a consolidated load factor of 84.3%, a 1.4 percentage point decrease versus Q3 2017. Yields were also weaker coming in 3.3% below last year. This year-over-year decline was mostly driven by the continued weakness in the Brazilian real and the Argentine peso. Combined sales in these two currencies represented about 28% of our total sales in 2017. During Q3 2017, our RASM was $0.106 and in Q3 2018, it came in at $0.101. Consolidated revenues increased 2% year-over-year to over $672 million. On the expense side, our third quarter operating expenses increased 11.2% year-over-year on the 6.6% capacity growth, which resulted in our cost per available seat mile increasing 4.3% to $0.09 specifically as a function of higher jet fuel prices. For the quarter, our effective oil and fuel price averaged $2.40 per gallon, an increase of almost 32% versus the $1.82 per gallon that we averaged in Q3 2017. Our total fuel expense for the quarter was $57.2 million above Q3 2017, of which $48.6 million are related to the fuel price increase. However, we were able to offset some of this increase with our continued savings initiatives. Specifically, we have already achieved the initial results of our corporate plan to reduce our yearly expenses by $50 million and have decided to expand the program to pursue additional opportunities in the range of $15 million per year. For the third quarter, our cost per available seat mile excluding fuel, ex-fuel CASM came in 5.5% lower year-over-year coming down from $0.063 in Q3, 2017 to $0.06 in this quarter. For the full year, we expect our ex-fuel CASM to come in at a very strong $0.062, one of the lowest for any full service carrier. Consolidated operating earnings for the quarter came in 38% lower at $74.3 million resulting in an operating margin of 11%, 7.3 percentage points lower than the 18.3% generated in Q3 2017. Looking at non-operating income and expense, the third quarter generated a net non-operating expense of $5.3 million compared to the $900,000 reported for Q3 2017, which included a $2.9 million gain from the mark-to-market of derivative contracts open at the time. Turning to net results, net earnings for the quarter came in at $57.7 million or earnings per share of $1.36, 45% lower than the earnings per share reported in Q3 2017. Turning to the balance sheet, we closed the quarter with a very strong financial position. Assets totaled $4.4 billion, owners' equity totaled $2 billion, debt plus capitalized leases totaled $2 billion, and our adjusted net debt-to-EBITDA ratio came in at a very strong 1.6 times, by far the lowest in our peer group. 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 3.4%. In regards to cash, short and long-term investments; we closed the quarter with $916 million. Our cash balance at the end of the quarter represents approximately 36% of last 12-month revenues. In terms of fleet, we received our first MAX9 during the quarter followed by our second and third MAX9s in the months of October and November and expect to receive two more aircraft during the fourth quarter to end the year with a total of 106 aircraft. It is important to note that we have already secured the financing for all the aircraft we will take delivery of in 2018 and 2019. We have also made the decision to reduce our Embraer fleet and have signed a letter of intent with Azorra Aviation for the sale of up to six E-190 aircraft, five of which are expected to leave our fleet during 2019. The transaction will cause an impairment to the entire Embraer fleet generating a one-time non-cash adjustment of around $163 million that will be recorded during the fourth quarter of 2018. The departure of these six aircraft will represent an estimated yearly benefit to the network of over $10 million. This transaction also is a reflection of the embedded flexibility in our fleet plan that we have discussed many times before and this flexibility allows us to adjust our capacity to the current economic environment. Finally, I'm pleased to announce that our Board of Directors has ratified the fourth quarterly dividend of $0.87 per share to be paid on December 14th to all shareholders of record as of November 30th. So to summarize, the third quarter performance was affected by the weakness in some of the currencies in the region as well as the increase in the price of jet fuel. However, we continue to deliver industry leading unit costs and we continue pursuing our cost savings initiatives. Our network continues being the most convenient for travel within the Americas with world-class operating indicators. We have one of the strongest balance sheets in the industry and we continue to return value to our shareholders. We are also updating our guidance for 2018 based on our expectations for the remainder of the year. We're maintaining our capacity growth in terms of ASMs at approximately 8%. And given the continued softness in the yield environment mainly driven by the weakness in currencies in Brazil and Argentina as well as the current expectation for fuel prices, we now expect our full-year operating margin to come in at approximately 12%. Our 2018 full-year guidance is based on the following assumptions. Load factor of approximately 84%, RASM of approximately $0.104, CASM ex-fuel of approximately $0.062, and a higher effective fuel price per gallon including into-plane of approximately $2.35. Although there is still very limited visibility into 2019 and there has been recent volatility in the price of fuel and in the regional currencies, we're also providing preliminary guidance for 2019 based on our operational plan and expectations for air travel demand. In terms of capacity, ASMs are expected to grow by approximately 3% and we are assuming continued weakness in the regional economies during the first half of the year and a moderate recovery during the second half. Therefore, our operating margin is expected in the range of 11% to 13%. Our 2019 preliminary full-year guidance is based on the following assumptions, CASM ex-fuel of approximately $0.062 and an effective fuel price per gallon including $0.27 of into-plane of approximately $2.35. Thank you. And with that, we'll open the call to some questions.

[Operator Instructions] And our first question will comes from Josh Milberg with Morgan Stanley. Your line is now open.

So, I'll just go with one question then. My question is on your guided $0.062 CASM ex-fuel, the number for 2019. I realize of course that inflation is a factor, but just wanted to understand why that number isn't showing more improvement just given all of the cost initiatives that you guys have highlighted obviously in areas of distribution, maintenance, and elsewhere and also the expansion in the targeted reductions in terms of savings from $50 million to $65 million that you guys just highlighted?

This is Jose here. And I first of all have to start by saying that our $0.062 CASM is the lowest that it's ever been for this year and so we're guiding for $0.062 for next year based mostly on the fact that our growth rate for next year is just 3%. And so as you know, even though we have the initiatives that you mentioned, there is of course some inflation assumed in there as well related to overflight fees, airport fees, and just regular salaries and benefit inflation. So, there is some inflation embedded in the $0.062 figure and also driven by the fact that our growth for next year is low at 3%.

Our next question will come from the line of Helane Becker with Cowen & Company. Her line is now open.

I have two questions. First is, Pedro, when you think about the Avianca codeshare agreement that you guys just signed, can you just talk about how you envision it working? And in terms of percentage of seats filled, you're pretty full so how many passengers realistically do you think you would get? So, maybe how should we think about that? And then my other question is when you're earning the dividend, but when you think about your payout ratio, it's what 40% this year I think, can you just remind us of how the board thinks about the payout and how we should think about it for 2019?

This is Jose here. We'll answer first the second question related to the dividend. Our current policy is to payout 40% of prior year's adjusted net income. So, our board has not mentioned anything about changing that policy so we will expect that that dividend payout ratio would maintain itself. As you know, our company is very strong about returning value to the shareholder.

In terms of your first question, Helane, it's Pedro. I think you referred to the three way Avianca, Copa, United JB or joint business agreement that was announced. That has not yet been made official so still negotiations need to conclude. Hopefully that will happen before the end of the year and it's going to then take at least a year-and-a-half to get it all approved especially in Panama, Colombia, and the US. So, this will at best enter into effect towards the end of 2020 I would say and it relates mostly - I mean it relates only to revenues or traffic between South America or Latin America let's say with some exclusions and the US and vice versa. So, it's US to Latin America.

No, I just thought there was a comment recently that you and one of the other airlines had reviews as though had signed a codeshare agreement and I was just kind of wondering how we should think about that. And then the Avianca thing was very helpful.

So again, the Avianca thing is end of 2020 so we will have time to talk some more about that, especially once it's official. We recently announced a codeshare agreement with Azul and we know Azul is a growing airline in Brazil and Brazil is a very important market for us. Azul also has a close relationship with United, as a matter of fact United is part owner of Azul. So, I think this is going to strengthen our connectivity inside Brazil and help the performance of our Brazilian network going forward.

And our next question will come from the line of Dan McKenzie with Buckingham Research. Your line is now open.

I got a couple questions here. First, what percent of revenue for Copa is from the Northeast of Brazil to the US? And how should we think about the impact of the new non-stop flying from a couple of Brazilian airlines with respect to the Copa revenue story?

It's not significant. First thing I should say, Dan, is that our service to the Northeast of Brazil altogether is less than a flight per day. I think it's six flights per week of maybe seven flights per week. That's the extent of our service to the Northeast of Brazil to Panama and that includes connections to Central America, Mexico, the Caribbean, and the US. So, it's not very significant. Plus two-thirds of our Northeast Brazil service is very recent, is from July of this year. So, we're only starting to build those markets. So, it's not like we're facing competition that's going against very established markets and that we have to now make up. And I would say that even though the timing for that Northeast Brazil service was not ideal starting in July when Brazil was in the middle of getting back, the flights were doing okay. Surprisingly so, they're not doing so back. Obviously yields are hurting, but loads are okay and we're very, very optimistic about the future of our Northeast Brazil service.

And with respect to Argentina, Pedro, I'm wondering if you can elaborate on the supply-demand dynamic to Buenos Aires versus the rest of the country and how that might tie to your confidence that things can get better in 2019 to that country?

First, I should say that what has happened in Argentina in terms of currency devaluation was massive. Argentina currency in the third quarter devaluated over 50% and industry sales were down over 40% in the Argentina market. So, it's very, very massive. We also know from experience is that Argentina always comes back so we are optimistic medium and long term, but right now the yield environment is extremely difficult in Argentina. So, again industry sales over 40% down - BSP IATA sales over 40% down and those three unit fares in dollars are around 25% to 30% down. I mean it's a tough situation and I'm giving you numbers up to October. So more recently we're seeing demand in terms of load factor coming back and actually looking quite okay year-over-year, but again yields still extremely weak. And yes, Buenos Aires is holding up better than some of the other destinations.

And then do you have an update of when fare families might get turned on and what that contribution could potentially be as we think about the better IT behind some of the revenue management?

I think we had fallen behind in some of these IT tools or initiatives. So, the good thing with that is that we have a lot of upside ahead of us. A lot of the airlines have had the right IT tools for a while, that's all ahead of us. So, the new passenger service user interface that we have just implemented is allowing us to sell ancillary at the call center and soon at the airport. And then your specific question, it's going to be more towards the end of 2019. We are in the final stretch of negotiating contracts for all the tools that will allow us to be very effective with fare families, basically second half of 2019.

Our next question will come from the line of Savanthi Syth, Raymond James. Your line is now open.

Just a quick question on the E-190s. Any thoughts on when those might come out of the system and how we should think about capacity growth next year in the first part of the year versus the second part of the year?

This is Jose here. The E-190s are expected to leave, I think it's mostly in the first part of the year and they will be replaced with aircraft. So, I think that most of the growth that we have for next year is actually on gauge and it is back-loaded towards the second half of the year. So, that's kind of how the 3% growth for next year is expected to pan out.

And just on Wingo, it seems like there's a favorable outlook. I wonder if you could give a little bit more color there and just how big can Wingo get if you continue to see good results there?

Yes. We've been very conservative and careful with Wingo and we're taking it one day at a time or maybe one month or one quarter at a time. So, next step is that we're going to upgauge from 700 to 800. That's going to make their unit cost much more effective and it's going to have a nice impact to their profitability potential. And as mentioned, a fifth aircraft which is about 20% capacity, which we're going to probably base in Panama. There are a few markets and it's going to fly - we do feed interchange. It's going to fly throughout their network, but it's going to be probably based at the secondary airport they serve in Panama and again we're going by steps. How big can Wingo get? It depends on many things; depends on the market, on capacity from everyone. We don't have specific plans and we'll just be very opportunistic with the airline.

And our next question will come from the line of Alejandro Przygoda with Credit Suisse. Your line is now open.

So regarding the correction of the previous annual financial statements and considering the reduction of the previous depreciation expense, what can we expect going forward?

Yes. So just to give you a little bit of background there. As part of our IFRS 16 adoption process, we found an error in the way that we did the accruals for maintenance on owned aircraft and most of the correction is from years prior to 2015 and they occurred basically back in 2009 when we migrated from US GAAP to IFRS. And as you saw in our statement, you have an increase in the years between 2015 and 2017 of around $50 million for those three years. We expect going forward that the impact to the D&A line is going to be lower than that and it is embedded into our full-year 2019 guidance. When you take this change in accrual policy together with some of the other items that we're announcing like the E-190 and the incoming aircraft, on an overall basis it's not material or not significant in the overall CASM ex of the company. So overall, we don't expect it to change going forward the CASM of the company.

And just a second question, if I may. So regarding the jet fuel provided in the 2019 guidance, what would be the implicit price for the Brent that you are expecting?

In terms of Brent - so we got I think $2.08 jet fuel assumption for next year. We got it in terms of jet and that's around a $72 Brent and about WTI is $66 per barrel.

So, it's 66 for Brent and ..?

No. It's $72 for Brent and WTI at $66 - around $66. There's been a lot of volatility in terms of the crack spread in recent months. So, that's I think an item that we have to take into account as well when converting from fuel into jet fuel. And so I think that the good way of looking at it is a $2.08 per gallon jet fuel assumption excluding into-plane, right. And as I mentioned in my script, we have an assumption of $0.27 per gallon of into-plane as well in our guidance for next year.

And our next question will come from the line of Stephen Trent with Citi. Your line is now open.

Just one question from me also accounting related. When we think about next year's implementation of IFRS 16, what's the indication so to speak with respect to where you guys might capitalize the leases given that some of your leases are pretty long tenured, but you've also got a young fleet? So, any indication would be helpful.

Steve, it's a great question. As you know, IFRS 16, which is the lease standard is coming in line in the year 2019. We're still working on the adoption of the standard. It's a pretty complex sort of standard that worldwide is being implemented this year. Our CASM assumption for the year at $0.062 assumes already the implementation of the standard. And as a matter of fact from the balance sheet standpoint, we are envisioning that our balance sheet once you capitalize the leases, I mean again very preliminarily because we're still implementing the standard, but we are seeing it that the capitalized leases are going to be coming in at a lower rate than the 7 times ex than what is kind of usual for the market. So, that's a kind of a preliminary assessment of this. But we will have more information on that in our Q4 earnings call once we conclude the implementation.

And our next question will come from the line of Duane Pfennigwerth with Evercore. Your line is now open.

This is Ray on for Duane. Your full guidance seems to imply unit revenue down roughly 7% in 4Q. Do you think you could break that out between how much of that is being driven by Argentina and how much of that is Brazil?

This is Jose here. Basically most of it is related to Brazil and Argentina indeed. The both of them are on a unit revenue basis down on a year-over-year basis in a double-digit range. So yes, the rest of the network there is essentially flat here. Some of them are slightly down, but the big drivers there are either Brazil and Argentina or influenced by the fleet of Brazil and Argentina. So I'd say most of it is related to these two markets that are originating in nature for us in terms of passengers.

And on a brighter note, what markets are you seeing improvement in?

I think South American markets are performing reasonably well. And so yes, there are some markets out there that are still doing well. So there what I'm saying is that the big downturn is encapsulated into kind of the deep south especially Brazil and Argentina.

And our next question will come from the line of Michael Linenberg with Deutsche Bank. Your line is now open.

This is Chris on for Mike. Just had two questions here. First, could you help us just quantify the synergistic benefits and the timing around the codeshare you announced last week with Azul? We're trying to understand whether it might help mitigate some of the yield weakness you anticipate into the first half of the year in Brazil next year?

This is Pedro. It's always hard to predict. It's always going to be positive. It's better feed, it's more effective feed, and again it's more about revenue synergies. It's something that's really difficult to predict. It has just started and it's not something that we factor in our numbers. It's always an upside, but we don't really have a specific projection for it. It's something more kind of an after effect analysis that we do knowing that there's really no downside to implementing a codeshare especially with an airline with a vast network in a country that's very important for us. So, the cost of doing so is so small that we basically look at how the two networks come together. We do look at the potential benefit, but we don't really make any projections. We just wait to see what happens. So, hard for us to predict. We know it's going to be positive.

And then given some of the changes you discussed around the fleet plan, how should we think about CapEx next year?

So, our CapEx for next year I'd say on a total basis it's about $600 million of which, cash CapEx is around $200 million. So, I think that's a good way of looking at it.

And our next question will come from the line of Pedro Pascal with JPMorgan. Your line is now open.

Quick one I think for Jose. Could you share with us what assumption are you using for your next year guidance in terms of currencies for Brazil and Argentina, the average spot prices?

I'd say that the assumption in general terms is that the currencies are going to remain in the case of Brazil sort of flattish. I think that in the case of Argentina, we still are not seeing a recovery so it is very, very hard to determine if there will be a recovery. The way that we're framing it is that we are assuming from a unit revenue basis still a drop in unit revenues in a low-to-mid single-digit on a percent basis for the first half and then a slight recovery in the low single digits for the second half of the year. And so the other aspect that is important to mention related to the currencies is that we saw the big trough in the currency exchange rate back let's call it about a month-and-a-half ago and those sales that were made a month-and-a-half ago are influencing the fourth quarter and the very early part of 2019. So, a lot of that is embedded in the guidance. So, what I mean by this is that there is a lag between the exchange rate at one particular moment and how that translates into our revenues.

And our last question will come from the line of Dan McKenzie with Buckingham Research. Your line is now open.

Actually my question follows up on those last two. With respect to the non-fuel cost guide for 2019, can you remind us what percent of the costs are affected by swings in foreign exchange? And I guess what I'm getting at is if we see a material strengthening in either the Argentine peso or Brazilian real, I'm just wondering how that might impact your non-fuel cost outlook for next year?

I want to say about two-thirds of our costs are in US dollars and the rest are in foreign currencies. But the majority of that, one-third is in the Colombian peso. So, it isn't really - we don't have a significant cost base in either Brazil or Argentina.

And then just kind of following up here, it seems like there has been some volatility in kind of the recent demand data. It seems like it could be tied to the elections in perhaps US and Brazil. And so I'm just wondering if you kind of look at the revenue outlook to the end of the year whether that outlook flat lines the recent lag down at least it seems visible in the publicly available data or is a temporary blip? And I'm just kind of wondering how you're thinking about holiday demand this year? I'm just trying to get at some perspective around kind of the full-year guide as it pertains to the fourth quarter here?

Dan, it's Pedro. Let me make a few comments and then let Jose also add. But so our Q4 - our fourth quarter revenue projections, I think as Jose alluded to, are based on mostly on the sales that were made in the middle of the currency crisis in Brazil and Argentina so during the third quarter. So, Q4 was doomed in a way because of when we sell Q4 and when this happened and that's also affecting some of the Q1 revenue and at least the Q1 projections we have right now. If we can remember the Brazil real hit BRL4.20, it's now at BRL3.70 and the Argentina peso hit ARS42 and it's now at ARS36. So, kind of at the worst of that currency devaluation is when we were selling Q4 and some of January and February of the first quarter. So, those revenue projections are affected by that. But that's the reality, right, that's real, that's what happened. Lately, as I mentioned before, we are seeing a demand in terms of traffic strengthening in both markets. We have also cut back some capacity so that obviously helps, cutting capacity helps. But load factors year-over-year are either flat or above 2017 in both Brazil and Argentina in terms of what we're seeing right now. But yields are still very weak. So in both markets for the reasons I just mentioned, we are projecting a weaker yield in the first quarter. But we are optimistic that we're going to see a recovery the rest of the year. How soon and how strong, hard to tell right now.

I was going to say exactly that. I think that what we're seeing is Brazil is stabilizing a little bit ahead of Argentina at this stage. So, that's I think a point of reference for what we're - how we're seeing things at the moment.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session for today. So, now it is my pleasure to hand the conference back over Mr. Pedro Heilbron for any closing comments or remarks.

Thank you. So, this concludes our earnings call. Thank you for being with us. Thank you for your continued support. And I want to emphasize that we have all the pieces in the right place and this - maybe I'm repeating myself, but we have the best unit cost of almost any full service airline. Our hub is still in the best geographic position and still growing and strengthening and operationally, we have a product that customers want to fly. So, we faced very strong headwinds. Maybe again, maybe that's the story of the last few years in these two markets, but we know those markets are coming back and we're going to be in the best position to continue returning a very strong margin. So, again thank you and have a great day.

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