Ladies and gentlemen, thank you for standing by. Welcome to Copa Holdings' first quarter earnings call. During the presentation, all participants will be in listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question, you will have to press Star then One on your touchtone phone. As a reminder, this call is being webcast and recorded on May 12, 2022. Now, I will turn the conference call over to Daniel Tapia, Director of Investor Relations. Sir, you may begin.
Thank you, Mel, and welcome everyone to our first quarter earnings call. Joining us today are Pedro Heilbron, CEO of Copa Holdings, and Jose Montero, our CFO. First, Pedro will start by going over our first quarter highlights, followed by Jose, who will discuss our financial results. Immediately after, we will open the call for questions from analysts. Copa Holdings financial reports have been prepared in accordance with International Financial Reporting Standards. In today's call, 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. Now, I'd like to turn the call over to our CEO, Mr. Pedro Heilbron.
Thank you, Daniel. Good morning to all, and thanks for participating in our first quarter earnings call. Before we begin, I'd like to thank all our coworkers for their commitment to the company and recognize their continuous efforts and dedication to keep Copa at the forefront of Latin American aviation. To them, as always, my utmost respect and admiration. While we face challenges in Q1, such as the impact in January and February of the Omicron variant on our operations and demand for air travel, as well as a significant increase in jet fuel prices, we were still able to deliver a profitable quarter. In terms of the main highlights for the quarter, our capacity reached 88% of first quarter 2019 ASMs. Fuel CASM decreased from $0.061 in Q1 2019 to $0.06.
Unit revenues or RASM came in at $0.102, a decrease of 3% when compared to Q1 2019, and approximately 10% lower than Q4 2021, mostly as a result of the Omicron impact on load factors and yields. Our Q1 operating margin came in at 7.8%, slightly above the range we guided to. In terms of fleet, during the quarter, we took delivery of two 737 MAX 9s. With the addition of this aircraft and the remaining deliveries for the year, more than 20% of our fleet will be composed of MAX aircraft by the end of the year, resulting in valuable fuel efficiencies to our operation. I'm also pleased to mention that Copa Airlines delivered an on-time performance of 91.3% and a completion factor of 99.3%. Again, among the best in the industry.
These results are a true testament to our employees' dedication and commitment to delivering a world-class travel experience for our passengers. In terms of our network, we restarted service to 4 cities during the quarter and announced 2 new cities to start in June: Santa Marta in Colombia and Barcelona in Venezuela. Ending the quarter with service to 72 cities in 30 countries, compared to 80 cities in 33 countries before the pandemic. As we continue strengthening and solidifying our position as the most complete and convenient hub in Latin America. Turning now to Wingo. Wingo received its 8th 737-800 and continued its regional expansion by launching a new route from Medellín, Colombia to Santo Domingo in the Dominican Republic. As you can see from our results, we have been executing both operationally and financially despite continued headwinds.
Although the demand environment in the region is recovering at a steady pace, fuel prices have increased dramatically, which combined with what's historically a low season quarter, lead us to expect lower second quarter margins. José will share our Q2 guidance during his presentation. I want to reiterate that we have a proven and strong business model, which is based on operating the best and most convenient network for intra-Latin America travel from our Hub of the Americas, leveraging Panama's advantageous geographic position with low unit costs, best on-time performance, and strongest balance sheet. We expect that going forward, our Hub of the Americas will be an even more valuable source of strategic advantage. Now I'll turn it over to José, who will go over our financial results in more detail.
Thank you, Pedro. Good morning, everyone. Thanks for being with us today. I'd like to join Pedro in acknowledging our great team for all the efforts they make to deliver a world-class service to our passengers. I will start by going over our first quarter results. Capacity came in at 5.6 billion available seat miles, which is approximately 88% of our first quarter 2019 capacity. Load factor came in at an average of 81.5% for the quarter, a 1.9 percentage point decrease compared to Q4 2021, given that we operated 10% more ASMs, and were also impacted by the Omicron wave in January and February. We reported a net profit of $19.8 million or $0.47 per share.
Excluding special items, we would have reported a net profit of $29.5 million or $0.70 per share. Special items for the quarter totaled $9.7 million, consisting of an unrealized mark-to-market loss of $6.8 million related to the company's convertible notes issued in 2020, and an unrealized $2.9 million dollar loss related to changes in the value of financial investments. We reported a quarterly operating profit of $44.8 million on an operating margin of 7.8%. Unit cost excluding fuel improved versus the previous quarter, coming in at 6 cents per ASM, driven by our continued focus on reducing expenses as well as a quarter-over-quarter capacity growth of 10%. Unit revenues came in at 10.2 cents, a 3% decrease when compared to the same period in 2019.
Finally, our cargo revenues for the quarter came in over 40% above our cargo revenues for Q1 2019, driven by an improved cargo demand environment in the region. I'm going to spend some time now discussing our balance sheet and liquidity. As of the end of the first quarter, we had assets of close to $4.4 billion, and our cash short and long-term investments ended at $1.2 billion, which represents 65% of last twelve months revenues. In terms of debt, we ended the quarter with $1.6 billion in debt and lease liabilities at similar levels to those reported as of the end of the fourth quarter of 2021, and our adjusted net debt to EBITDA ratio came in at 0.8 times.
I want to highlight that our average cost of aircraft-related debt for the quarter was 2.3%, and more than 80% of it is financed at fixed interest rates, limiting our exposure to the current increasing interest rate environment. Turning now to our fleet, during the first quarter, we received two 737 MAX nine to end the quarter with a total of 92 aircraft. Our total fleet is comprised of 68 737 eight hundreds, 16 737 MAX nines, and nine 737 seven hundreds. These figures include three 737 seven hundreds, which are currently in temporary storage, and one 737 eight hundred freighter. As to our outlook, based on the current state of the demand environment and the current expectation of the price of fuel, we can provide the following guidance for the second quarter of 2022.
We expect capacity to be approximately 96% of Q2 2019 levels, or about 5.9 billion ASMs, and we expect our operating margin to be in the range of 3%-5%. We are basing our Q2 2022 outlook on the following assumptions. Load factor of approximately 86%, unit revenues of approximately 11.3 cents, CASM ex fuel of approximately 6 cents, and an all-in fuel price of $4 per gallon. Given the current volatility in the environment, we believe it is premature to give complete full-year guidance. However, preliminarily, we expect our full-year 2022 capacity to be approximately 98% of 2019 ASMs and our CASM ex fuel to be approximately 5.9 cents. Thank you. With that, we'll open the call to some questions.
Thank you. Ladies and gentlemen, if you have a question at this time, please press the star and then the number one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. We have the first question. Comes from the line of Savanthi Syth of Raymond James. Your line is now open.
Hey, good morning. Just on the revenue guide that you have, load factors are really strong, higher than kind of historical levels that we've seen. Could you talk a little bit about what you're seeing in terms of demand? Is there just, you know, business demand coming in that's been strengthening, what you've seen on the leisure side, or is this still driven by leisure?
Hi, Savi. It's Pedro. Good morning.
Sure.
It's mainly leisure, like it's been the case in the last number of months. However, we are seeing an uptick in business travel. It's still. I mean, in the first quarter, it was still in the 50% range, our corporate business versus 2019, but it's increasing in April and in the same quarter, it's picking up. Again, it's mostly leisure and VFR travel.
That's helpful. If I might ask on the capital allocation side, it looks like you did some share buyback here in the first quarter. Should we expect kind of a similar momentum going forward? I wonder if you can talk a little bit about, when you might be comfortable introducing a dividend again.
Yeah. Savi, we indeed, have a very strong liquidity position, and we've been actually generating cash for the last year. We believe there was an opportunity to reactivate our approved $250 million program that we have ongoing. Thereby also bringing value to our shareholders.
In terms of.
Dividend.
Yeah, dividend return. That program is, pretty much done by the way. We're like in the final stretch, that started many years ago. In terms of dividend, we still have the same dividend policy we had before. We're paying out 40% of net profits for the year. At the end of this year, our board will consider our 2022 results and decide accordingly.
If I might follow up on that's super helpful to address it. If you think about, maybe increasing your buyback program or, if anything that might kind of cause you pause to reinstating the dividend, what are you looking at and what is the board considering in terms of cash flow or environment?
In terms of the dividend, I mean, I cannot speak for our board right now, but if we stay in a solid cash position and deliver the expected profits this year, and we are on track, I would say, I would assume that the board is gonna be. It's gonna look favorably at just, reinstating our dividend policy, which again, still in place.
All right. Thank you.
Thank you, Savi.
Thank you. We have the next question comes from the line of Duane Pfennigwerth of Evercore ISI. Your line is now open. You may ask your question.
Hey, guys. Good morning. Thank you. Just on your comments on business travel, can you comment regionally where you're seeing that pick up and, you know, recently on travel policy restrictions, any notable changes with respect to easing?
Again, it's just ticking up in the second quarter, which is a positive development, but still not a significant change versus what we've seen before. Again, it's the right trend, which is encouraging for all. I would say it's all over the place. We have a very balanced and diversified Intra-America network. I would not really point out a specific market.
Yeah. I think all regions are performing reasonably in line with kind of what the average is for the network.
Along the lines of some of Savi's questions on capital allocation, how do you think about the convertible? You know, how long do you wanna live with that? Is that something you look at, paying down or ultimately settling in shares at some point?
Yeah. That's something that you know, we look at quite a bit. Again, we have been, as I mentioned before, we have this active buyback program that is ongoing. So, yeah, we always look at this. Also in light of the fact that our liquidity levels are strong right now and that we're cash flow positive. We are always looking at that as alternatives, keep our options open in terms of mitigating or managing the liabilities that we have.
Great. Then just for my last one, as you sort of think about the competitive environment and higher fuel, can you talk about I mean, again, your guidance was ahead of where we were despite a higher fuel assumption. You know, the fuel recovery is clearly working. As you look out over the kind of booking curve, can you just remind us, you know, are there fuel surcharge dynamics? What are you seeing sort of incrementally kind of in the yield outlook beyond what is typically a seasonally softer two Q for you? Thanks for taking the questions.
Yeah. That's a very important question, Duane. You know, for Q2, when you sort of isolate the sort of seasonality into the quarter and the stronger demand environment that we're seeing sequentially, you know, you see that through the load factor guide that we put out, and you see specifically Q2 as such, you know, I think we're in a position to say that we're capturing almost half of the fuel increases through our yield moves that we've made. You know, with the coming months and quarters, we expect that to continue a positive trend. For Q2, that's kind of the visibility that we're seeing right now. The increases in yields are through RM functions and fare actions.
We're very active in that space, of course, given the fuel environment and how it is.
Is it fair to say that recapture is sort of increasing and building as you look out, further into the future?
Correct. Correct.
Thanks for taking the questions.
Thank you, Duane.
Thank you. The next question comes from the line of Alejandro Zamacona of Credit Suisse. Your line is now open. You may ask your question.
Hi, Pedro. Thank you for the call. It's been a long time since the potential JBA with Avianca and United. I'm wondering if this potential plan is something that's still on the table or nothing more, and how this potential deal may change after the recent contribution agreement with Avianca and GOL. Thank you.
As you know, it's been a very kind of up and down time since the pandemic. We did sign a JBA, the three airlines. Avianca then went into bankruptcy, Chapter 11 proceedings during the pandemic, which put everything on hold, and the pandemic itself put everything on hold. The expectation was to sit down the three airlines and rethink the JBA and figure out when was the right time to implement it, if that was the desire of all three airlines. Now, with this new development, which just came up yesterday, and I don't think anybody really knew about it, I would assume this whole JBA conversation is gonna have another twist, and we'll see.
It's hard for us to say right now, what's gonna be the decision of them or of the other partners, the three partners that make part of that JBA. It's up in the air right now, I would say. It's still there. It's still something that we need to talk about.
Okay. Thank you, Pedro. My second question, if I may, in terms of the cost reductions, I mean, do you feel comfortable to say these cost reductions are actually rather a cost efficiency rather than a cost reduction on a temporary basis?
Yes, totally cost efficiencies. We work on cost efficiencies. We work on sustainable cost reductions. Even during the pandemic, at the beginning of the pandemic, it's not over, we were offered. We went back to our leasing lessors, aircraft lessors, for example, just as an example of how we think, and we were offered, like, temporary reductions, which would then kick back later on, and that was not attractive to us. When we show cost reductions or lower costs, it's because, you know, we plan to keep it that way.
Thank you.
Thank you. Next question we have the line of Michael Linenberg of Deutsche Bank. Your line is now open. You may ask your question.
You answered Duane's question about your fuel recapture is actually increasing and building, and yet we're also dealing with a much higher fuel price in the June quarter than what we were in the March quarter. I just wanna clarify that it does seem like that the revenue trend is not only very strong, but it's accelerating. Is that a fair assessment based on what you said?
My comments related to the fuel recapture, and by the way, Mike, I missed, I don't know the first part of the question, but the way that I got it was that whether the recapture was getting stronger as time went by. My comment related to the fact that our revenue or yield moves are sort of covering almost half of the fuel increases specifically for the second quarter. That's specifically what we're seeing in the second quarter. In the second quarter, ultimately what we're seeing is that fuel is increasing faster than the revenue recapture we're making, just specifically given where the spot and the immediate curve over the next month and a half is in terms of fuel.
Going forward, of course, we are continuing to put in our RM and pricing moves in such a way to be able to increase that percentage, as time goes by.
Okay. That's helpful. Sort of a follow-up and tie to it is that, last quarter, you know, it looked like that, you know, by year-end you were gonna get to sort of 93% of your 2019 capacity, and you now are five points higher. We're looking at 98%. When we look across, the industry and we look at other competitors, for a whole host of reasons, some of it is labor shortages and the like, but also some of it is higher fuel prices. We've seen carriers actually scale back their growth aspirations in 2022. What are you seeing in the back part of the year where you feel that much more confident that you wanna put on more capacity? Maybe you're just being opportunistic.
Yeah. Mike, we're seeing a recovering robust revenue environment or traffic or demand environment certainly in the region. W e're seeing positive trends in the demand environment in our space in particular.
Right. Mike, let's also remember that, you know, not every carrier has recuperated the same capacity. There are some carriers in, especially in domestic markets, that are above 2019.
Mm-hmm.
We're still not at 100%, so we're still trying to get to 100%, and we'll be there in the second half of the year. I think that needs to be kept in mind also.
Okay. Very good. Just lastly, Pedro, since I have you on the response to Abra, you know, to say that there's a twist there sort of feels like a bit of an understatement, you know, knowing that United has equity in Avianca, and yet, as I believe, United still has an antitrust immunized agreement with you guys. That's just for starters. When we start thinking about all the other connections, I think you also codeshare with GOL in a bilateral relationship. The list goes on. I guess the question that I wanna ask, though, is that with the announcement of Abra, some of the questions we were getting from investors is that the market is concerned that that is a negative for Copa, and Copa will be compelled to respond in some way, shape, or form.
What are your thoughts on that? Does that make sense? Or, you know, where do you come out on that? Thank you. Thanks for my question.
Okay. That's a good question to answer. Do we have time? Well, first thing I must say is that the news came out yesterday. I don't think anybody knew before yesterday. Yesterday, most of the day we were preparing for this call. W e haven't really spent a lot of time thinking of the spider web that the Abra news kind of presents to all. I'll say a few things. We have faced, many challenges and consolidations and, you know, a bunch of stuff in the last, let's say, 20 years. W e usually have a good answer. Usually our answer is doing more of the same but just in a better, more effective, and more efficient way.
Because at the end of the day, we have a very, very solid and resilient business model, which from what I read, is not really losing its strength or its uniqueness. As a matter of fact, we might be the only carrier with the right product for the business traveler in our part of the world. That's a plus. It was not like that maybe before the pandemic, but the way some of our competitors, including Abra, is going, that might be the case. Even if it's not, we have a unique, very strong hub model, not only with low cost, but we've shown the ability to keep costs low and put them lower when needed. We have efficient planes. We have a strong product, a strong network.
We're actually confident that we're in a good position. I won't talk about if we have to react or not. I think if we choose to stay focused on our business model, I think we can continue to be very successful doing it that way.
Very good. Thanks, Pedro.
Thank you. We have the next question comes from the line of Pablo Monsivais of Barclays. Your line is now open. You may ask your question.
Hi. Thanks for taking my question. I just have one question. The first one is in terms of your unit revenue. I don't know if you have the calculation, but if Omicron, I mean, taking out the impact of Omicron, do you have a sense of what unit revenue should look like? That's number one. Number two, if we take also out the effect of a higher jet fuel price environment for the second quarter, what would be the level of unit revenues? I guess I'm trying to get what is the trend on a normalized basis of the unit revenue. Thank you.
Yeah. Pablo, I would say, I think I don't wanna talk about sort of what if, because the reality of what we're facing is we did face Omicron, and we did face you know we are facing a high fuel environment. The reality is that I would say that you know on a normalized basis, this year was gonna be a recovery year for us. Overall, our margin, I think, you would argue that it would've been almost back to where a regular year was for us.
I think, initially, if you wanna have all these sort of external factors in there, you would've had a very close to normal year in terms of operating margin for us. Again, the reality is otherwise. As you can see, we've adapted to it in a very good way. We are low cost and we are able to pass on some of the increases to the other yields that we have.
Perfect. Thank you.
Thank you, Pablo.
Thank you. We have the next question. Comes from Helane Becker of Cowen. Your line is now open. You may ask your question.
Thanks very much, operator. Hi, everybody, and thank you for the time. The one freighter that you have, what's the revenue opportunity from cargo that exists for you guys?
Hi, Helene. We serve a region, and we're not in the long haul wide body market. A lot of the markets we serve are not well-served by kind of the big international cargo carriers. It's a niche we feel that can be further developed. Right now it's just a single freighter, and maybe a second later on. Not this year or next year, but maybe after that. Although we're very successful in our freight business, it's mostly belly cargo and this niche cargo operation. I don't think it's gonna be.
I mean, it's valuable to our bottom line, but it's not something that's gonna go through the roof and change results in a way that's much different to what it is right now.
Elaine, one more thing related to the cargo aircraft. I think we mentioned that back in our February call that the 800 that we have, that we converted, it will also mostly serve as a replacement for an older airplane that we already were wet leasing from a third party. It will just provide us for sort of this complementary service that we have for full cargo service into certain markets, complementing the belly freight that we have, which is the main source of revenues for us.
Okay. Thank you.
Thank you.
Oh, the other question I had was on the loyalty program. Since the traffic is mostly visiting friends and relatives and leisure, is the loyalty program an important part of the business going forward, or are leisure customers taking advantage of that as well?
It is an important part of the business, and we have a successful loyalty program. Leisure travelers also take advantage of it. Business travel is coming back step by step also. We should not forget that. The loyalty program also generates non-air mile revenues, which are also important.
Okay. Those are all my questions. Thank you.
Thank you, Helane.
The next question we have off the line of Dan McKenzie of Seaport Global. Your line is now open. You may ask your question.
Oh, hey, good morning, guys. Thanks. My first question is for you, Pedro. You have been through too many cycles to count here, and it just seems like we are now in a new era of rising inflation, interest rates, and a strengthening dollar. I guess my question is, does this backdrop cause you to view this next cycle more cautiously, or are higher commodity prices ultimately the bigger economic stimulus for Latin America? I guess, what I'm really trying to get at is, Latin American demand has historically been more inelastic, and I'm just, you know, wondering if that, you know, from where you sit, if that can continue to be the case.
Yeah. Thank you, Dan. You're right in what you're saying. With time, going through so many situations, actually, I think we kind of get used to or learn that the region in general is quite resilient. I mean, we're also very diversified in our route network. Sales on global markets suffer the same way, and we've been able to increase capacity and revenues consistently over time. Of course, not during a pandemic like what we lived in 2020 and 2021, but we've lived through many crises. There's always a silver lining somewhere.
Yes, it could be a stronger demand from higher commodity prices in some countries, making up for others that might not be doing as well. Right now, as Jose mentioned, we're seeing strong demand. Although that could change, and every crisis is different, again, we're confident on our business model, the resiliency of our business model. W e think we can weather the current crisis, and the Hub of the Americas and Copa are in a very unique position to come out strong. You know, we take every crisis seriously. We try to take advantage of the same, and hopefully this time will be the same.
I guess I'm gonna try the same question, different conference call here from last quarter, and that's just on fare searches for copa.com, not bookings, so the searches, versus 2019. H ow have searches been trending? You know, just given some of the macro volatility. How are these searches affecting your view of future demand? Is it. I guess I'm just trying to get at, you know, the durability of pent-up demand here.
It's all looking positive right now.
Yeah.
The CASMs are kind of in line.
With 2019.
Yeah, with 2019 and with demand in general. We're seeing demand, let's say, from now on, very similar to 2019 levels and searches are in line with that, so.
Yep. Just encouraging, I think, in terms of what we're seeing with the current environment.
Those searches are despite business demand that remains down pretty substantially, I guess is the caveat, right?
That is correct.
Yeah. Okay. Thanks so much for the time, you guys.
Good. Thank you, Dan.
Thank you. For the last question, we have the line of Felipe Nielsen of Citi. Your line is now open. You may ask your question.
Hello, guys. Thank you for taking my question. I'd like just to do a quick follow-up on the GOL-Avianca agreement. I was just wondering if you could help me understand what are the main risks in terms of demand exposure and routes through Latin America and Central America in connection between Latin America and U.S. What are the main risks that this agreement brings to Copa and where do you see the major risks like what are the. Is that in trunk routes? Which connectivity do you see the greater risk?
Yeah. First thing I should say that we have not really spent much time. As I mentioned before, this is news for all. We have not spent much time analyzing it. We will in the coming days. I'll stay away from specific answers for that reason. Conceptually, I feel there's room, you know, there's room for all. Maybe not for everyone that wants to come in, but for the ones that are in the market and in our region, we think there's room for all. Consolidation tends, you know, in most cases tends to be a positive, not only for the airlines consolidating, but also for the other competitors like us.
In many cases, it's more complex for the ones consolidating, trying to combine different styles and cultures and the whole thing. We have always bet for a very simple, straightforward, effective, Panama-based hub model, and this takes nothing away from that. If anything, it might, help us make it stronger, but we'll see. Again, we haven't spent much time on it, and we're still very positive about our future.
Great. Super, super clear and helpful. Thank you, guys.
Thank you, Felipe.
Thank you. I would now like to turn the call over to Mr. Pedro Heilbron. Sir?
Yeah. Thank you all. This concludes our earnings call. Thank you for being with us, and thank you for your continued support. Have a great day, and we'll see you in the next call. Thank you.
Thank you, ladies and gentlemen. Thank you for your participation. That concludes the presentation. You may disconnect and have a wonderful day.