Ladies and gentlemen, thank you for standing by, and welcome to the Copa Holdings first quarter earnings call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a Q&A session. At that time, if you have a question, you will have to press star then one on your touch-tone telephone. As a reminder, this call is being webcast and recorded on May 7th, 2020. Now, I will turn the conference call over to Raul Pascual, Director of Investor Relations. Sir, you may begin.
Thank you, Crystal. Welcome everyone to our first quarter earnings call. Joining us today are Pedro Heilbron, CEO of Copa Holdings, and José Montero, our CFO. First, Pedro will start with our first quarter highlights, followed by José, who will discuss our financial results. Immediately after, we will open the call for questions from analysts. Copa Holdings financial reports have been prepared in accordance with International Financial Reporting Standards. In today's call, 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 has been posted on the company's website, copa.com. Our discussion today will also contain forward-looking statements, not limited to historical facts that reflect the company's current beliefs, expectations, and/or intentions regarding future events and results.
These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially and are based on assumptions subject to change. Many of these are discussed in our annual report filed with the SEC. 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 first quarter earnings call. I hope that all of you and your families are doing well and staying safe. Today, we won't spend much time going over our first quarter results, and we'll focus mostly on the COVID-19 crisis and the many initiatives we have undertaken to assure that Copa is one of the best-positioned airlines to survive and prosper in a post-crisis world. Before we begin, I'd like to thank all of our coworkers for their commitment to our company and recognize their efforts and many sacrifices in response to this crisis. To them, my utmost respect and admiration. We've delivered strong operational and financial results for the months of January and February, with operating margins above 20% for the two months.
However, in the second week of March, we started seeing a significant and rapid deterioration in demand as the first COVID-19 cases were detected in our region. Furthermore, to slow down the outbreak, many governments, including Panama, imposed significant travel restrictions, which eventually led to a suspension of all our commercial flights on March 22nd. During the first quarter, passenger traffic decreased 16.3% year-over-year on a capacity reduction of 14.4%. This resulted in an 81.5% load factor, 1.9 percentage points lower year-over-year. Yields came in at $0.128, 5.8% higher than in the first quarter of 2019.
On the cost side, a fuel unit cost came in at $0.066 or 8% higher year-over-year as a result of the significant cancellations in March due to the COVID-19 outbreak, and later in the month, the suspension of the company's flights, resulting in a significant year-over-year capacity reduction. Our operating margin for the quarter came in at 16.6%. I'll now address some of our actions in response to the COVID-19 crisis, focusing on liquidity initiatives, capital preservation, network and fleet plans, and adjustments to our product. Even though we began the quarter with a strong cash position, with so much uncertainty regarding the long-term economic impact of this crisis, the timing and shape of the eventual recovery, and the future availability of other liquidity sources, one of our main and immediate priorities was to further strengthen our liquidity.
In March, we drew $144 million from unsecured short-term credit lines. In April, we obtained additional unsecured committed credit facilities for an aggregate amount of $150 million, On April 30th, we closed an offering for $350 million in senior unsecured convertible notes maturing in 2025. We continue working on additional liquidity sources, which José will provide more details on. In terms of capital preservation, we have canceled or deferred all capital expenditures that are deemed non-essential to our operations. Our board of directors has postponed the dividend payment for the remaining quarters of 2020. We're working on cost reduction initiatives, including renegotiating our main supplier contract and reevaluating our entire fixed cost structure. Most of our employees used their vacation time during the first month of the suspension of flights.
Over 800 employees have opted for retirement or voluntary separation packages, and more than 700 have taken voluntary six-month or 12-month unpaid leaves. For the month of May, more than 90% of our management and administrative workforce has taken a voluntary 50% pay cut. In terms of our network and fleet plans, assuming there are no further extensions to the air travel restrictions in Panama, we plan to restart our operations on June 1st with a scaled-down schedule equivalent to about 12% of our June 2019 capacity. Our current plan is to gradually spool up our network so that by December 2020, we're at about 40% of December 2019 capacity. We will adjust these plans according to market conditions and intend to only schedule flights that can, at a minimum, cover variable expense.
We continue negotiating with Boeing and expect to reach an agreement on fair compensation for the MAX grounding and a delivery stream that takes into account the post-crisis reality. We continue with the plan to sell our 14 Embraer 190s and are now evaluating the retirement or sale of our 14 Boeing 737-700s, as when we restart flights, we intend to focus our operations on a simplified fleet consisting exclusively of Boeing 737-800s and MAX 9s. We're also adjusting our product to ensure we meet our customer needs and expectations, including establishing a strong biosafety protocol, which will be in place before we restart flights in June, including a much simplified onboard offering.
Recognizing the impact this crisis is having on our most loyal customers, we have extended ConnectMiles status through February of 2022, and we have waived all change penalties and provided flexibility to our customers by extending the expiration on travel credits until December 31, 2021. As you can see, we have proactively taken the necessary measures to manage this crisis in the best possible way and will continue to do so in the months to come. Lastly, we have a very solid business model, which is based on operating the best and most convenient network for intra-Latin America travel from our Hub of the Americas, leveraging Panama's advantageous geographic position with the region's lowest unit cost, best on-time performance, and strongest balance sheet.
Going forward, the company expects that its Hub of the Americas will be an even more valuable source of strategic advantage, especially if fewer intra-Latin America markets are able to sustain direct point-to-point service. We believe our hub will be the best position to serve these markets. I'll turn it over to José, who will go over our financial results in more detail.
Thank you, Pedro. Good morning, everyone, and thanks for being with us today. I'd like to join Pedro in acknowledging our great Copa team, who through this unprecedented crisis, the worst in the history of the aviation industry, have truly shown their great spirit. You make us proud. I will start by briefly going over our first quarter results. Our capacity came in 14% below Q1 2019, mainly as a result of the suspension of our operations on March 22nd because of the COVID-19 pandemic. Our load factor came in 1.9 percentage points lower at 81.5%, which combined with a 6% increase in yields, resulted in a unit revenue improvement of 3.5% to $0.108. Excluding fuel, our unit cost came in at $0.066, which is higher year over year, mostly due to the suspension of operations during the latter part of March.
Our operating margin came in 0.2 percentage points lower than Q1 2019 at 16.6%. Reported net income for the quarter came in at $74.3 million, which translates to earnings per share of $1.75. Looking forward to the remainder of the year, as Pedro mentioned, since March 22nd, our operations have been suspended by the government of Panama due to the COVID-19 pandemic. As of now, the government has established a date of May 22nd for the reopening of the country to commercial passenger operations, and we have published a return to service effective June 1st. This schedule represents about 12% of 2019 capacity for the month of June and builds up to 40% by year-end 2020. As a worst-case scenario, if we are to assume a zero-revenue environment, we estimate that our cash burn will be around $85 million per month.
This figure assumes reimbursement in cash of around half of our ticket sales liability and that our leased aircraft and debt commitments are paid in full. It also assumes certain reductions in our labor and other fixed expenses for the year. Assuming a successful gradual restart of operations, we should be able to reduce our average monthly cash outflow to around $70 million for the remainder of 2020. I'm going to spend some time discussing our balance sheet and our liquidity. We ended Q1 with a very strong financial position. Assets total $4.4 billion. Owner's equity was almost $2 billion. Our debt plus our lease liabilities total $1.5 billion. Our lease liability adjusted net debt to EBITDA ratio came in at 0.5x . Our debt to equity ratio ended the quarter at less than 0.8x . Both measures are among the strongest in the industry.
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 2.8%. This debt balance includes $145 million in revolving short-term credit lines, which we drew on during the month of March. As part of our liquidity sources, we have also available to us another $150 million in committed unsecured short-term lines of credit, which we have not drawn. As to cash, short and long-term investments, we closed the quarter with $1.13 billion. As another source of liquidity, I'd like to highlight that we also have unencumbered assets with book values reaching $600 million. This includes 19 unencumbered aircraft, nine spare engines, and our entire aircraft spare parts inventory, among others. I want to turn now to the $350 million convertible note issuance, which we successfully completed last week.
The notes had a tenor of five years, a coupon of 4.5%, and a convert strike price of $51.66 per share. In the current environment, where no one is sure about the duration of the effects of the COVID-19 crisis, we strongly believe that maximizing liquidity is one of the keys to our future. These convertible notes are part of our liquidity strategy, which is also composed of the $295 million in lines of credit, the launch of a secured revolving credit facility that would leverage a set of unencumbered assets that I discussed before, and the potential sale of several of our aircraft. Finally, as we announced last week during our Q1 earnings pre-release, due to the current environment, our board of directors decided to postpone the payment of the remainder of the 2020 dividend declared by the company.
That is $0.80 per share for each of the three remaining quarters of 2020. To summarize, we delivered good financial results for the first quarter of 2020, despite the fact that our operations were disrupted and eventually suspended during the latter part of March, given the COVID-19 pandemic. We ended the quarter with a strong financial position, having $1.13 billion in cash and equivalents. During the month of April, we obtained additional sources of liquidity, including $350 million in proceeds from our convertible notes offering, as well as $150 million in additional undrawn committed lines of credit. We are working to lower our fixed costs, and even under an assumption of zero revenues, we expect to burn around $85 million per month.
Once we restart, which we expect will happen in June, this average cash burn figure could be in the range of $70 million per month for the rest of the year. Let me close by saying that once this terrible situation passes, we believe Hub of the Americas will once again be the best connecting point for travel in the region, with a privileged location, an even more efficient business model, and the best team in the industry. We are working harder than ever with these goals in mind. Thank you. With that, we'll open the call to some questions.
Thank you. Ladies and gentlemen, if you have a question, please press star then the number 1 on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, press the pound key. Your first question comes from Savi Syth with Raymond James.
Hey, good morning. José, if I might clarify, you mentioned additional financing sources. What are the ones that you have in tapped that you're planning? I know you mentioned potential sale of a couple of aircraft. I'm just wondering, and even just what you have on the pipeline, just what's the attractiveness of capital raising opportunities out there? What are the loan to values looking like these days? Thanks.
Yeah. Savi, I think the next step is working on a revolving credit facility that is in the final stages of being documented. It will be based initially with a subset of the unencumbered assets that we have. As of now, I'd say that it's in the 60% loan-to-value range, is I think a fair figure that we're seeing with that. I think that could potentially yield up to $200 million-$300 million in additional potential sources of liquidity. The facility is going to be relatively flexible in its form, and it'll initially probably start at a lower level, but it has an accordion feature to it that we can grow and shrink depending on our needs.
That's helpful. If I might, have you had discussions with Boeing? I know some of the other Boeing partners have received some payments and redone their fleet order book. Where are you in that process?
Well, we are right now in negotiations with Boeing. We're in that process right now. I think that's what we will say so far related to this.
All right. Thank you.
Your next question comes from the line of Duane Pfennigwerth with Evercore ISI.
Hey, guys. How are you?
Hello, Duane.
Just on your capacity plan, 12% of last year in June, growing to 40% of last year by year-end. Obviously, nobody knows. Your guess is going to be far better than mine, but how wide is the range of outcomes by 4Q? In other words, if you decide down 60% is way too low, how much flexibility do you have?
Yes, Duane, this is Pedro. Hope you're doing well. It's hard to tell, as you well said. No one really knows. We know that forward bookings are very weak right now, and this is industry bookings, not only Copa. We're monitoring the whole industry, and there's not much out there. Our June 12% capacity, I think, is in line with what we're seeing. For the end of the year, for December, it's really, really hard to tell, but we'll retain enough flexibility to go up or down depending on demand, how demand builds up again. That's a big part of our plan, retaining flexibility in terms of planes and crews.
Then just a longer-term question about capacity and CASM. You guys have been one of the most flexible in terms of being able to preserve a really nice CASM profile, despite the fact that whether your capacity assumptions change materially. As you think about 2021, what's the baseline where you feel like you could get back to, say, a 2019 CASM ex? Could you be down 20%, 30%, 40% and still have a hope of preserving a 2019 CASM ex? Just how do you think about that into next year? Thanks for taking the questions.
Duane, I think that it's too premature to determine what the CASM figure for next year is going to be because I think our focus right now is reducing our cost base as much as we can, both our fixed costs and eventually, when we start flying again, our variable costs. A CASM ex target right now is not our area of focus. It's just simply pure costs and reducing the total amount of costs that we have.
Fair. I guess just the potential. Could you manage to a business that's, call it, 30% smaller 2021 versus 2019? It just feels like you'd have a much better shot at managing your cost to that level of capacity than, say, the average airline.
Well, I think that we already started with a low base, and we're pulling all the levers that we need to pull to continue having a low unit cost. There will be some pressures because of the lower level of ASMs. Certainly, I think if anybody has that ability to produce our ASMs at a low cost, it's going to be us.
Thank you, guys.
Your next question comes from the line of Hunter Keay. with Wolfe Research.
Hi, everybody. Good morning.
Good morning.
Pedro, you talked about simplification a lot. You also mentioned a simpler onboard offering. I'm wondering how LOPA or any just broad interior configuration may factor into that discussion. Maybe it's also a question about these lie-flat seats, but it's overall just an aircraft configuration question. Thanks.
Yeah. Thanks, Hunter. We're not planning to make any aircraft configuration changes. We don't think it's worth investing. That would not be an essential investment for the company. We're leaving configuration untouched. It's going to have more to do with product offering. We've always been a full-service airline. We deliver full service at low cost, lower than most other airlines. Going forward, we're going to even further simplify our onboard product to reduce that interaction between crews and passengers. Also, we'll take advantage of opportunities that will make us even more cost-effective. Also, simplification comes from a single configuration of Boeing 737-800 and MAX 9s.
I'm sorry. I meant longer term. That's my mistake. I realize that's not a near-term question, but I think when this thing is all done, as you think about this over the next few years, is what I was asking. Sorry.
Right. We're going to have Boeing 737-800s with a simple unified configuration for, let's say, medium to short hauls. We'll have a MAX 9 configuration with the lie-flat seats for longer haul flights. I would think that would be a good guess of how we're going to look like in a few years.
That's great. Thanks. To piggyback a little bit on Duane's second question was, as you think about the opportunity for Copa, let's just say we're back to 2019 capacity levels in 2023, 2024, whenever it may be. Do you think we should expect margins to be in that sort of high teens, 18%-20% range as well? Are you making any other changes that you think maybe should make that move higher or lower when things are sort of back to normal?
Hunter, it's hard to tell. There's like no way we can guess right now how things are going to look back in 2022 or 2023 or 2024 from a demand point of view. What I can tell you is that we will take advantage of this really difficult crisis to make the airline even better and more competitive, make it leaner, make it more cost-effective. That's kind of how we do things. We'll be in a better position than most everyone to take advantage of whatever is offered to us or to survive whatever is in front of us. Part of that mix depends on demand, and that's really hard to predict right now.
Understood. Thank you.
Thanks a lot, Hunter.
Your next question comes from Joseph DeNardi with Stifel.
Yeah, thanks. Good afternoon. José, can you just talk about the liquidity that you guys have now? Is that being raised because that's what you think you'll need to kind of get through this, or that's what you want to have to be able to go on offense at some point?
Well, Joe, this is, I think, as a function of the uncertain environment where we're in, and we're just building. I think we're starting this crisis with a position of strength in terms of the balance sheet. Given the uncertainty, we don't know how long this will last, and frankly, what other curveballs might be coming in the world over the next several months. We want to build just simply a fortress to be able to sustain the situation, and be able to come out on the other side strengthened. I wouldn't say that it's necessarily to give us the ability to play offense. We've always ran our business in a way that is conservative from the standpoint of the balance sheet and with profitability in mind. I think that's something that even under a very difficult operating environment, this is still kind of our driving force.
Okay. That's helpful. Pedro, sorry if you mentioned this in your prepared remarks. I was a little late getting on. When you all start flying again, what does the passenger experience look like in the airport, on board, what do those changes maybe in terms of, I don't know, slower utilization, what does that mean for the cost structure? I imagine that some of that may evolve over time, to the extent that it doesn't, does that mean anything for the financials of the business? Thank you.
In terms of what it means to the financials, we will stay within the range we've always been at. We're not expecting to, let's say, spend more money or have higher unit costs. At least that's our plan right now. We're still waiting for world standards, which are not very clear right now. We have been flying some special flights, not many, but a few special flights a week to get stranded passengers back home. We've been applying some of the safety protocols or biosafety protocols that will become standard in the future. For example, we are requiring all passengers and all crews to wear masks. We're also checking passengers before they board.
The way we board and the way we check in passengers, all of those procedures have changed in our special flights, and we expect most of that to remain once we start scheduled operations, hopefully, in June. The product will be simplified also, as I mentioned before, to reduce the interaction between crews and passengers. There will be some cost savings there, which should offset the additional cost from biosafety. Still hard to know exactly what all of that is going to look like.
Thank you.
Your next question comes from the line of Conor Cunningham with Cowen.
Hey, guys. Appreciate the time. Just to piggyback on Duane's first question. I know there's obviously a wide range of expectations on 4Q. How quickly can you actually add capacity back? Is it a matter of weeks or months? I know that 4Q is still kind of a ways out. Just curious, if you saw something a month out, could you add back capacity at that point?
Yeah, it obviously depends on how much capacity we need to add. We'll have extra lift, extra aircraft available to us for immediate flying. If it's one or two additional aircraft worth of flying, that would be very easy. We will also have some aircraft in temporary storage, and getting those out of storage will take maybe a few weeks. It depends on how many aircraft we need to bring back. We'll have enough flexibility to add or reduce capacity because this could go either way. We don't really know.
Maybe, I realize that the liquidity position looks pretty good, and you guys are adding more, and that's good to hear, but curious on what demand level you would need to see for you to get to cash flow breakeven. I realize that's a hard question to answer, but just curious on, with your current expectations on capacity, what timeline or what quarter do you think you could achieve free cash flow or, sorry, cash flow breakeven?
Start off.
Okay. I'll start with that answer, and José can back me up. There are many moving parts here, and it's hard to put a specific time to this. I know you're also asking what kind of demand. Our cash burn numbers imply really severe RASM reductions. We're hitting RASM very hard in our predictions. Anything that gets us anywhere between probably 0%- 20% RASM reductions probably gets us very close.
Yeah.
To cash neutral numbers.
Yeah, I think that's a key figure. If you're in the teens in terms of RASM dilution, you're basically at cash breakeven. The question is, when does that happen, and under what circumstance? That's, I think, left to be determined given how demand flows back over the next several months.
Of course, I'll add to that. With time being years, we will be able to adjust the airline size and cost base to whatever future demand is.
Sure.
That will take a few years.
Because that's assuming that we're carrying our entire, basically fixed Not entire fixed cost base, but our entire aircraft base. In terms of debt and leased airplanes, et cetera. With time, you'll be able to adjust that as well. That's kind of where that lies.
Okay. Maybe just one quick one. I know that you're not running the operation right now, so there's probably not a ton of searching going on your website. Have you seen any upticks in searches in the last couple of weeks, just given there's been talk of reopening and all that stuff kind of globally. Just curious if you've seen anything there.
Yeah. Not much. Nothing significant. That's not only in our website, but that's industry-wide numbers that we're monitoring. In Latin America, of course, in our region.
Okay. Great. Thank you.
Your next question comes from the line of Josh Milberg with Morgan Stanley.
Hi, everyone. Thank you guys for the call. My first one is a follow-up on the capacity ramp-up, and just on how you see the ASM being distributed geographically as you put them back. Just also taking into account some of the big currency moves in the region. I'm sure that those currency moves are part of what's behind your expectations for a big RASM hit.
Yes, Josh. Of course, the economic impact situation in our region, including the currency devaluations, are part of the mix, and it's all related, of course. Our capacity, the way we're going to ramp up capacity from here to year-end, it kind of mirrors what our network before the crisis. The percentages per region or per market are going to be very similar. However, we have flexibility to move capacity around, and we serve markets that go all the way from VFR, visiting friends and relatives, business, and leisure. We have a good balance in terms of the markets we serve. We'll closely monitor how demand comes back in each of those segments and adjust capacity accordingly.
Okay. That's very helpful. Can you guys also talk a little bit about the opportunity to take share coming out of the crisis? You mentioned some of the uncertainties there, but just given your competitors' difficulties, it seems like there would be a major opportunity. A related question is if you could just address the degree of overlap you had with your largest rival in Colombia just before COVID hit. At least for us, there's always been a little bit of murkiness on the degree of overlap that you've had with that competitor and your other major competitors, just because I think you compete in so many markets and because you've had this past focus on smaller markets that need a hub.
Right. We do think that our much broader network and larger intra-America hub and intra-Latin America hub will put us in a good strategic position, assuming many markets will have to shrink in size and won't be able to sustain direct point-to-point service. Panama being in the best geographic position and being the better and most efficient connecting hub should be in an advantageous position with those smaller markets. We always, as you know, we run the company first and foremost for our shareholders, and we do what's right for the company to be successful and profitable. We don't focus as much on our competitors. At least not in a way that sacrifices our own performance. We will take advantage of opportunities as part of just the way we run the business.
If we're in the best position to take advantage of markets that will either be abandoned or no longer sustain point-to-point service, or if we're going to be in a position to be able to come back at a faster pace, we'll do it because it's good for the business. That would be the main reason. That's the way it's been in the past, and it has worked very well for us.
That's great. I suppose there really isn't an easy way to quantify what that opportunity would be in terms of just the magnitude.
Yeah. Hard to tell right now. You asked also how much we overlap with our main competitors. The Panama hub and the Bogota hub are the ones that overlap the most. I would say that it's less than half of the markets where there's an overlap. Probably more like a 1/3 of the markets where there's an overlap.
Okay. That's great, color. Thank you guys very much.
Thank you, Josh.
Your next question comes from the line of Mike Linenberg with Deutsche Bank.
Oh, hey, good morning, everyone. Just a few questions here. Look, I see you loaded your June schedule, I think, in the last week or so. When I look at even some of your biggest city pairs, you're going to be flying less than daily, a lot of two-day-a-week type stuff for the time being, and then it slowly starts to ramp up. When I think about the success of Copa, it's all about connectivity. It does seem like that at least initially, your service is going to cater to the local market. It seems like it's going to be actually very difficult to construct connecting itineraries.
My sense is that as you look out, as you go from this 12% - 40%, it seems like there will be a point where city pairs that are two or four times a week will go to daily, and we'll get to a step function where 500 or 700 O&D itineraries will turn on, and you'll get a jump in load. Presumably, your loads will start at a low level, not just because of the weakness that we're seeing across the region, but because historically you rely so much on connecting traffic. Just your thoughts on that. Maybe initially, is it 90% local, 10% connect? Maybe you can give us a sense of the year. At what month do you think you actually get to maybe the 50/50 point local versus connect? I think you're going to see that in your loads.
I know there will be a big jump because I think my sense is that it'll be a step function increase. Just comments on that, or maybe my thesis is completely wrong here?
All right, Mike. There's a portion of it where you are correct, which is the fact that we start in June with an itinerary that is less than daily in many markets. We have actually crafted our itinerary precisely so that it connects. We've actually taken care from the standpoint of the overall frequencies in some of these cities, even understanding that aircraft utilization might not be the most efficient, just simply so that the markets connect. Yeah, we're catering from the start that the hub is a connecting hub, and we'll continue building upon that. As time passes throughout the year, yes, there will be more connecting O&Ds included because of both the number of frequencies and number of cities that we're adding.
From the start, you will have quite a bit of connectivity in the cities that we are starting with initially.
Okay.
Yeah. It does have quite a bit of connectivity in there. It's just simply that it's at a less than daily frequency.
Yeah. The only thing I'll add to that is that our planning team was very clever in putting the schedule together and preserving our full connectivity pretty much, even when not all markets are daily.
Yeah. No, I'm looking at the schedule, and it'll be remarkable to see where you actually do get connectivity, especially a lot of these flights that are twice a week.
Correct.
I guess there's going to be some busy days. Maybe every Friday and Sunday will be your busy day.
Yeah. There's some of that, and there's something there in terms of how we're rotating aircraft, et cetera. They were very clever in the way that they built it.
Okay. Great. Just another question as I think about you talked about the compensation on the MAX with Boeing. Obviously, you're still working through that. I think the last time I checked, I recall you having something, and I could be wrong on this number, but I recall you having something north of $450 million in pre-delivery deposits with Boeing. The question is, the fact that you're not taking airplanes and that you have this conversation ongoing, one, is that $450 million, is that in the right ballpark, and can we look to that as a potential source of financing as you work through the compensation agreement?
Yeah. Mike.
I should say liquidity. Not financing, but liquidity.
No, I understand. No, I understand the question. Yeah. The figure is in that ballpark in terms of the pre-delivery deposits that we have there at Boeing. The reality is that we're in discussions with Boeing right now. I will leave it at that for now.
That's fine. I just wanted to get confirmation of that number.
Yep.
Just my last question. José, and this is probably again to you, when we look at your air traffic liability, it did come down a lot from December to March, which I know seasonally, there's some changes here and there, but it was bigger, and I suspect that because you did shut down with, I don't know, seven, eight days to go at quarter end. You must have gotten a flood of cancellations. You indicated earlier that your guidance assumed that 50% of your cancellations were basically refunded in cash. Presumably, a lot of cash went out the door. As we look at that $412 million, that ATL, and we look at the June quarter, how much of that $412 actually covers?
Would you have a sense of how much of that actually covers the June Q since we've seen a lot of cancellations between now and then?
Yeah.
Any color that you could give on that? Thanks.
Yeah. I think, Mike, there's a couple of components to the reduction in the ATL. One is, as you well mentioned, there's some seasonality in there, but mostly is the fact that a lot of that ATL that we had in December basically flew in the first quarter, sales basically stopped coming in for the latter part of the first quarter. More than necessarily a significant amount of cash going out because of reimbursements, it was mostly because of sales not coming in.
I see.
During the latter part of the quarter. Yeah. That's more of the explanation. We have an estimate that for the remainder of 2020, upwards of around half of that ATL balance will go out in reimbursement. The one thing that I have to be very clear as well is that we've been very much forward in our opening of our flexibilization of tickets and credits for passengers and allowing them to use their tickets for future travel. We've been very flexible on that, and that's minimized the cash out. So far, we have not seen a significant amount of requests for reimbursements. Of course, that might change going forward.
There is a portion of that ASMs that is related to flying in the second quarter, and in April and May we have not flown, so there might be some additional pressure versus what we have observed right now, and that's what is in our figures, in the figures that we have put out, the cash burn figures that we put out for the remaining part of the year.
Should we look at that 50% as then being conservative because of what you just said about reimbursement?
From what I'm observing right now, yes. We don't know how that accelerates going forward and what are changes in behavior we might see. So far it is conservative in nature from what I'm seeing.
Yeah. That makes sense. I would say that whatever schedule you've put out for June, that is obviously subject to being changed again, and it's possible that you could scale that back from 12%-8% based on companies opening up or not over the next month or so.
Yeah.
Correct. That's exactly why we're trying to be fairly conservative with that assumption.
Yeah, that's super helpful. Thanks, everyone.
All right. Thank you.
Your next question comes from the line of Rogério Araújo from UBS.
Yeah. Hey, gentlemen. Thanks so much for the opportunity. I have a couple of questions here. First is a follow-up on Josh's question. I would like to explore a little bit more about Colombia. Is this scenario possible? If there is, for instance, a fast recovery of the domestic market versus international flights, if there is a capacity hole on that market, can we imagine Copa exploring more of that market and the mix of domestic flights versus international flights increasing significantly in the coming months? In other words, are you going to explore any market that is possible that may recover faster? Can we even expect maybe much less connectivity as a percentage of total flights for Copa in several months' time if those domestic flights recover faster? That's my first question. Thank you.
This is Pedro here, Rogério. I would say that a faster recovery does not mean that the market is going to be more profitable. We usually look at both things. I would say no, there will be no significant change in the next few months or from here to year-end, even though, of course, we have a Colombian operation, and we have Wingo in Colombia, which is a successful ULCC, but nothing is going to change overnight. I would not expect significant changes from here to year-end.
Okay. What about in the long term? Can this be a possible scenario in which domestic flights increase significantly inside Copa if there is, of course, an opportunity there?
I don't want to speculate long term, but we've always had the flexibility to take advantage of opportunities that might present.
Along the way. I don't want to speculate because we don't really know right now.
Okay. Sounds good. Thank you. My second question is regarding the convertible senior notes. The stock sold off after this was announced. We received a lot of questions on that matter. It would be great if you could provide more details on the process for which these notes release was decided within the management team. Why the company decided to issue that now and at the beginning of the crisis, also if a follow-on offer was also taken into consideration, and why the first one was the chosen option. Also, if there was a lot of demand for that note, with a strike price at $51.66. If you can say how many times oversubscribed it, if that was the case.
Lastly, in the case the notes are redeemed before the conversion period, which is as of October 24, will the company have to pay the equity upside from the potential conversion to the note holders? In other words, does that make whole premium include the equity upside as well? Thank you.
Yeah. I don't know how much we can answer or want to answer right now. We're going to try not to be a Monday morning quarterback. We're doing what makes sense for Copa to come out of this crisis as one of the better prepared, most successful, and poised-to-prosper-in-the-future airlines. We're doing what we think we need to do right now, to have a solid and successful future as we've always had. This is a crisis like we've never seen before. I would say a few things. One, that many of our board members are significant shareholders in the company, so this is not a decision that was taken lightly. Also, there's enough uncertainty regarding future demand and the timing and shape of recovery for us to be very conservative and make sure we have a fortress liquidity position, which is what we're building.
We're building for the long run, not for the short term. There's also a limit in what's going to be available going forward for an airline, being aviation one of the hardest hit markets. We take everything into account, and we conclude that building the cash fortress I mentioned, and via this note, is the best decision to, as I mentioned before, make sure that Copa comes out of this crisis in a strong position. We enter in a strong position. We want to come out in a strong position, and we want to be able to be an airline that continues succeeding in the future.
Yeah, that's very clear. Thank you. Only a follow-up here. A question I've been receiving. Is there any related parties in that transaction?
No.
Okay.
No.
Okay. Sounds good. Thanks so much, gentlemen. Have a great day, everyone.
Thank you.
Your next question comes from the line of Pablo Monsivais with Barclays.
Hello, good morning. Thanks for taking my question. I have a couple of questions. The first one is, I would like to have more color on your fleet plan. You mentioned you want to simplify further your fleet. Any sense of timing, priorities, how easy right now is to drop the E190s and the Boeing 737-700s? Another question on government restrictions. What are you assuming on that front, incorporating in your capacity recovery plan? My last question is on ticket reimbursement. I think that you already kind of touched on that, but what have you seen in the last six weeks, and what can we expect for modeling purposes to that number look like? Thank you.
Okay. Yeah, Pablo, first, in terms of the fleet plan. Yeah, as we discussed, we are assuming that the 14 E190s are disposed of. We already announced that last year. That was already in the plan. What we are announcing today is that we are also considering retiring the Boeing 737-700 fleet. That's 14 aircraft. There could be other fleet moves that we have going forward, just simply to match where we have demand at a particular moment. We would ultimately remain with a reduced fleet of Boeing 737-800s and MAX 9 aircraft in the company's fleet. There's a lot of moving parts. I think that there's several alternatives that are out there related to both the E190 and the 737-700.
We are actively looking at that, and what we have in mind is simply to adapt our fleet to reality and make the best decision for the company.
Again, we want to keep the flexibility so that we have the fleet that we need to operate, it will be essentially 737-800s and MAX 9s at this stage. In terms of government, we're tracking closely day by day what each government has in terms of restrictions. As of now, with the date that we have for commencing our operations in June, the published schedule that we have has included, we're flying to places where so far there are no significant restrictions for us to restart operations. That could change. Governments over the last week have been very active in just adapting their dates and their restrictions. So far what we have published has the ability to be flown during that moment. Again, it could change. It could change here or it could change in other of the neighboring countries that we have.
What we have observed in terms of ticket reimbursements is a lower figure than that average. If you spread out the assumption that we put out, which is close to 50%, and you assume a linear reduction of that 50% of the ATL, what we have seen in the months of March and April is lower than that figure that we have assumed. We are also expecting that this could accelerate, depending on what passenger behavior is, et cetera. That's the reason why we have somewhat of a higher figure in our forward assumptions. So far, the observed figure has been lower than what we have been including in our models.
Okay. Thank you.
Thanks, Pablo.
Your next question comes from the line of Gabriel Rezende from Bradesco BBI.
Hi, good morning. Two questions on my side. First, you mentioned the suspension of all non-essential CapEx considering the current situation. I was just wondering if you could provide some detail on how much are you expecting in terms of our essential CapEx for 2020, and whether it is included in the $85 million monthly cash burn you mentioned.
Yes.
The second question, are you considering any possibility of an aid plan from Panama government? Do you have any ongoing discussions on that? Thanks.
Yeah. I'll answer the first one, Gabriel. The non-essential CapEx that we have assumed basically is related to aircraft maintenance, kind of required CapEx from a regulatory perspective. It's in the mid-single digits per month on average, and it is included in the $85 million figure that we put out. That is included.
Pedro, that's right.
Yeah. In terms of, we're not requesting, nor are we expecting any aid from the government. I think the government has bigger issues to deal with. As we mentioned before, we came in in a stronger position than others, and we're taking the necessary measures, some very difficult, of course, to be able to survive this crisis and prosper in the future using our own means.
Okay. That's very helpful. Thanks.
Your next question comes from the line of Alejandro Zamacona with Credit Suisse.
Hi, Pedro, José, Raul. Thank you for the call. Just a follow-up question on the negotiations with Boeing. Have there been any kind of discussions on a potential revision to the order book with Boeing? What should be the new pace of deliveries after COVID-19?
It's all on the table, but there's not anything specific that I can share right now. We're still talking to them.
Okay. Thank you. In terms of capacity going beyond the year-end 2020, and the 40% recovery you're expecting, what should be our expectations in terms of going back to pre-COVID levels? Are you expecting a recovery of three years, four years, five years, or maybe longer term? Thank you.
Yeah. I don't think we know more than anyone else. The experts talk mostly about two to five years, probably most are in the range of three to four years, in that range. We don't really know anything that they don't know. No one really knows much. It's hard to tell. We're putting all of our efforts in, one, taking action in a proactive way, secondly, in making sure we prepare the company for whatever size we need to be in the future and whatever demand is out there available for us. We want to be successful, even if the industry is not at pre-crisis levels for a long time.
Your final question comes from the line of Stephen Trent with Citi.
Hello, gentlemen. Thanks very much for taking my question. Hope you and your families are well. Just two very quick follow-ups from me. I mean, kind of actually one. When you think about the long-term strategic landscape and the potential that the stronger carriers in the region benefit from some potential demand spillover, kind of a follow-up to Josh Milberg's question. Is anything at this juncture leading you to think differently about, one, your potential joint business agreement with United Airlines, with one of the partners there seeming to, not either of you, but one of your partners seems to be in some difficulties. Two, at this early stage, once again, any way that you are thinking longer term on the redeployment of Wingo, perhaps more aggressively or even less aggressively? Just kind of wanted to get your thoughts there. Thank you.
I would say first that we feel our Hub of the Americas in Panama is going to be an even more valuable strategic asset in the future. If the industry has to shrink, or if that happens, and that will probably happen for a while, I mean, that's pretty certain, there'll be a number of markets that will need a hub more than before, and we're the better hub in terms of geographic position and ease of connectivity, et cetera. Panama will be even more relevant than before, and we should be in a position to take advantage of that, again, from the standpoint of the strategic position, but also being a stronger carrier from a balance sheet standpoint. We should be in a good position there. We'll be flexible, as mentioned before.
Wingo in Colombia will be flexible, and Copa in Panama and throughout the Americas will move up and down depending on the opportunities. We don't want to just get ahead of ourselves, and we don't want to do things because someone else is weaker. We want to make sure we are strong and that we take advantage of all the opportunities that belong to us. Everything that makes sense for Copa to remain as a profitable airline going forward, no matter the size that it will be.
Okay. That's crystal clear. Thanks for that, Pedro, and hope that you and your family stay healthy.
Thank you, Stephen.
Thank you, Stephen.
I am showing no further questions at this time. I would now like to hand the conference back over to Pedro.
Okay. Thank you all. This concludes our earnings call. Thank you for being with us. Thank you for your continued support. Please stay safe and healthy, and be sure that we're taking all the necessary actions to make sure that Copa comes out of this crisis in good shape and ready to continue to prosper in the future, even though we know there are rough times ahead for the aviation industry. We hope to be one of the airlines that does better, relatively speaking, and again, that is in a good position for what's ahead in the long run. Thank you again. Stay safe, stay healthy, and see you in the next call.
Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.