Nov 13, 2015
Executives
Rafael Arias - Director-Investor Relations Pedro Heilbron - Chief Executive Officer & Director Jose Montero - Chief Financial Officer
Analysts
Hunter K. Keay - Wolfe Research LLC Michael Linenberg - Deutsche Bank Securities, Inc.
Savanthi N. Syth - Raymond James & Associates, Inc.
Helane Becker - Cowen & Co. LLC Duane Pfennigwerth - Evercore ISI Leandro Fontanesi - Bradesco S/A CTVM Márcio Prado - Goldman Sachs do Brasil CTVM SA Ravi Jain - HSBC Securities USA, Inc.
Dan J. McKenzie - The Buckingham Research Group, Inc.
Stephen Trent - Citigroup Global Markets, Inc. (Broker) Bruno Amorim - Santander CCVM SA Pablo Zaldivar - GBM Grupo Bursátil Mexicano SAB de CV Casa de Bolsa Renato Salomone - Itaú Corretora de Valores SA
Operator
Ladies and gentlemen, thank you for standing by. Welcome to Copa Holdings' Third Quarter Earnings Call.
During the presentation, all participants will be on a listen-only mode. Afterwards, we will conduct the question-and-answer session.
As a reminder, this call is being webcast and recorded on November 13, 2015. Now I will turn the call over to Rafael Arias, Director of Investor Relations.
Sir, you may begin.
Rafael Arias - Director-Investor Relations
Thank you very much, Roland, and welcome, everyone, to our third quarter earnings call. Joining us today are Pedro Heilbron, CEO of Copa Holdings; and Jose Montero, our Chief Financial Officer.
First, Pedro will start with our third quarter highlights; followed by Jose, who will discuss our financial results. Immediately after, we will open up the call for questions from analysts.
Copa Holdings' third quarter financial results have been prepared in accordance with International Financial Reporting Standards. In today's call, we will discuss non-IFRS financial measures.
A reconciliation of the non-IFRS to IFRS financial measures can be found in our third quarter earnings release, which has been posted on the company's website, copa.com. In addition, our discussion will contain forward-looking statements not limited to historical facts that reflect the company's current beliefs, expectations and/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 that are subject to change. Many of these risks and uncertainties are discussed in our Annual Report filed with the SEC.
Now, I'd like to turn the call over to our CEO, Pedro Heilbron.
Pedro Heilbron - Chief Executive Officer & Director
Thank you, Rafa. Good morning to all and thank you for participating in our third quarter earnings call.
Financial results for the quarter were in line with expectations, as Latin America continues to be affected by slower economic growth and weaker currencies. We expect the situation to continue in the short to medium term.
That being said, we continue to be proactive in making adjustments to our fleet and network in an effort to maximize revenues in a challenging demand environment, and we continue focusing on controlling costs and delivering a superior product. Ultimately, we're well positioned with the strongest network and the financial strength to come out ahead of this economic cycle.
Among the key points for the quarter, our revenues, as anticipated, were significantly affected coming in almost 18% lower year-over-year and our unit revenues decreased 19% year-over-year, driven by a 20% reduction in yields and a flat load factor. At the same time, we achieved lower unit costs as CASM decreased 12% from $0.104 to $0.092, while our CASM ex-fuel came in flat at $0.064, still amongst the best of any airline.
This led to an operating margin of 9% for the quarter. On the operational front, we delivered on-time performance of nearly 90% during the quarter, once again amongst the best in the industry.
And in October, Copa Holdings won the World Travel Award for Mexico and Central America's leading airline. This marks the third year in a row we have won this award.
We're very proud of our employees' commitment to provide world-class service day after day, and to adhere to the highest standards of operational excellence. In terms of financial results, the third quarter operating margin has historically been higher than the second quarter, due to seasonally stronger revenues.
However, unit revenues only improved slightly quarter-over-quarter, as the economies in Latin America, particularly in South America are still soft, and currencies continue to devalue against the U.S. dollar.
This was not unexpected as we had discussed during our previous earnings call. The main affected markets are still Venezuela, Brazil and Colombia.
In Venezuela, third quarter load factors improved versus the level we saw in June, yet yields were still down significantly year-over-year. Brazil's revenue weakness mainly comes from further economic slowdown and the effect on travel of currency devaluation.
We have been reducing capacity in this market. We recently announced that we will stop serving Campinas in December and are looking to further adjust capacity in the first quarter of 2016.
The capacity reductions have helped. While load factors remain lower year-over-year, they improved materially quarter-over-quarter.
And even though yields were slightly weaker quarter-over-quarter, overall profitability in Brazil improved during the third quarter. Colombia's load factors during the third quarter were higher than last year; however, yields were down significantly due to the effect of the large Colombian peso devaluation and additional competitive capacity.
In terms of our overall advance bookings for the fourth quarter, we see load factors trending slightly up versus prior year, but with lower yields quarter-over-quarter as the economic slowdown and currency weakness continues to weigh in Latin American market. For these reasons, we have slightly adjusted our 2015 unit revenue guidance from plus or minus $0.105 to plus or minus $0.104, and have therefore narrowed our operating margin guidance to 11% to 12%.
Now turning to 2016; according to the IMF, while most economies in the region should see modest improvement in 2016, economic headwinds in Brazil, Venezuela and Argentina should limit the opportunity of a full recovery. For this reason, next year we're targeting low-single-digit capacity growth which will be below our 2015 capacity growth.
We expect this more modest expansion, along with better regional economic performance, will lead to a slight unit revenue improvement in 2016 over the last three quarters of 2015. In terms of fleet, we continue making adjustments to our fleet plan.
This year, we will grow the fleet by only two aircraft as we take in nine new 737-800 deliveries, return five expiring leases and sublease two aircraft. Recently, we decided to defer two additional aircraft deliveries to later years, one from Q4 2016, and another from Q1 2017.
So for 2016, we're now expecting only one aircraft delivery, a new Boeing 737-800 delivering in June. Regarding our network expansion, we continue to look for opportunities to expand and strengthen our network and hub, serving unique markets that lack connectivity to our region.
During the third quarter, we started service to Puebla and Villahermosa in Mexico and a daily flight to San Francisco. We will also launch two weekly frequencies to Belize beginning in December.
Turning now to our new loyalty program, ConnectMiles' growth and adoption rates have exceeded our expectations. During October, we exceeded our full-year membership goals for both overall and preferred members.
The growth of the program's partnerships has also been excellent. BAC Credomatic, the largest credit card issuer in Central America, has experienced strong growth with the ConnectMiles co-branded credit card.
Likewise, Banco General, the largest bank in Panama, launched its ConnectMiles co-branded credit card in October and has also realized strong demand for the product. We're set to launch a ConnectMiles co-branded credit card in Colombia before year end and expect to add two to three additional partnerships in new markets in 2016.
These partner relations will provide both brand and loyalty building elements in addition to being key revenue drivers for Copa. So to summarize, third quarter financial results came in as previously expected.
The regional economic environment remains soft, and we expect additional yield pressure during the fourth quarter. We expect a modest improvement to unit revenues in 2016 versus the last three quarters of 2015, as economies in the region are expected to improve slightly and currencies should stabilize.
We're taking the necessary commercial actions to mitigate this softer demand cycle while maintaining capacity discipline, and at the same time, optimizing and strengthening our network. Our team continues to deliver world-class operational performance and service levels while achieving leading unit costs.
And in spite of the downturn in the economies of Latin America, we have the best hub and strongest network for travel within the Americas, leading unit cost and a solid liquidity position with low leverage, which will allow us to come out an even stronger airline in the future. Nonetheless, we're not being complacent with our financial outlook for 2016 and are working to maximize our results in the short term.
Now, I'll turn it over to Jose, who will go over our financial results for the third quarter in more detail.
Jose Montero - Chief Financial Officer
Thank you, Pedro, and good morning, everyone. Thanks again for joining us.
I want to highlight as in our last quarter our team's discipline in controlling our costs particularly in a time of slower capacity growth, which is key to maintaining our company's strong financial position. During the quarter, revenues decreased almost 18% year-over-year to $547 million.
Passenger yields were 20% lower year-over-year, mainly driven by yield decreases in the Venezuela, Brazil and Colombia markets. Furthermore, we grew available seat miles by 2%.
Revenue passenger miles grew at a similar rate. As a result, consolidated load factor came in at 76.3%, a 21 percentage point decrease over Q3 2014.
Our third quarter operating expenses decreased 10% year-over-year and our cost per available seat mile decreased 12% to $0.092 from $0.104 in the third quarter of 2014. The lower CASM was driven by 31% lower jet fuel prices.
Additionally, our CASM ex-fuel for the third quarter came in at $0.064, flat versus Q3 2014. This was driven by reductions in our labor costs, passenger servicing and overhead unit costs, as well as lower sales-related expenses, which helped offset increases in costs from the launch of our new loyalty program and costs associated with fleet returns.
For the fourth quarter, we expect to have a higher ex-fuel CASM given timing of certain expenses as well as the expenses related to the scheduled return of three leased aircraft. However, as you can see, delivering our product with low unit cost continues to be one of the company's core strengths.
In terms of operating results, consolidated operating earnings for the third quarter came in at $50.6 million, representing an operating margin of 9.2%, comparable to the second quarter. In terms of net results, reported net earnings for the quarter, including extraordinary items, came in at $6.2 million or earnings per share of $0.14 compared to last year's third quarter net income of $66 million or $1.49 per share.
When excluding extraordinary items, mainly a fuel hedge mark-to-market loss of $26.8 million, a $2.1 million loss in the valuation of the Venezuelan Bolivar, and a $2.3 million loss on the mark-to-market of our share repurchase program, underlying net income for the quarter came in at $37.4 million or earnings per share of $0.85, equivalent to an underlying net margin of 7%, as a result of our sustained low unit costs and superior model. With respect to fuel hedges, we ended the third quarter with hedges for 25% of our fuel volume.
For full-year 2015, we were hedged for 28% of our projected volume, meaning using jet fuel swaps at an average equivalent price of $2.70 per gallon. We also have approximately 32% covered for 2016.
27% is covered using jet fuel swaps at an average price of $2.35 per gallon and 5% using zero-cost collars. Turning to the balance sheet, assets reached almost $4.2 billion at the end of the quarter.
Owners' equity totaled approximately $2.1 billion. Debt plus capitalized leases totaled $2.1 billion and our adjusted net debt-to-EBITDAR ratio, excluding all of our cash in Venezuela, came in at 2.4 times, which continues to be the lowest in our peer group.
In terms of debt, we closed the quarter with approximately $1.25 billion in bank debt, about 56% of which is fixed rate with a blended rate including fixed and floating rate debt of approximately 2.5%. Looking at cash, short and long-term investments, we closed the quarter with $1.1 billion, which represents approximately 43% of last 12 months' revenues.
However, as of the end of the quarter, $427 million of our cash was in Venezuela pending repatriation. Excluding all the cash in Venezuela, the company ended the quarter with over $650 million in cash, which represents roughly 27% of last 12 months' revenues.
In terms of fleet, we ended the quarter with a fleet of 99 aircraft, 59 737-800s, 14 737-700s and 26 Embraer 190s. So far this year, we have taken delivery of eight new Boeing 737-800s.
We expect to take delivery of one additional new Boeing 737-800 in November; and as of the end of the year, we will have returned five aircraft under operating lease and sub-leased two 737-700s. Therefore, we're expected to end the year with a fleet of 100 aircraft.
As part of our approved share repurchase program, during the quarter, we commenced a $100 million accelerated share repurchase program or ASR. 500,000 shares were delivered to us before the close of the third quarter, with the remaining shares to be delivered at the culmination of the agreement, which will finalize before the end of 2015.
By that time, we would have completed over half of the $250 million program approved by our board. Finally, as per company policy, on December 15, we will pay our fourth quarter dividend in the amount of $0.84 per share to shareholders of record as of November 30, 2015.
So, going back to our results and to recap, demand for air travel in our region is being affected by low economic growth and further devalued currencies in Latin America. However, we have the most developed and strongest route network in the region.
We continue to deliver world-class unit costs. We have one of the strongest balance sheets in the industry, and we continue returning value to our shareholders.
In terms of our guidance for full-year 2015, given fuel prices, the economic outlook in the region, further devaluation of currencies and demand trends, we're updating our 2015 full-year guidance as follows. We're maintaining our capacity growth in terms of ASMs at plus or minus 5%; load factor is still expected to come in at plus or minus 75%; we're lowering our RASM guidance to plus or minus $0.104 based on our near-term forecast; we're maintaining our CASM ex-fuel guidance at plus or minus $0.065; we are lowering our fuel price assumption for the year to an effective price per gallon of $2.18, including into-plane and net of hedges; and with respect to our operating margin, we're narrowing our guidance to a range of 11% to 12%.
Today, we're also providing preliminary guidance for 2016, based on our operational plan and demand outlook for the year. Keep in mind that our visibility as of now is still very limited.
As such, given overall economic trends in the region, we expect the following; ASMs are expected to grow plus or minus 3%; load factor is expected in the range of 76%; RASM is estimated to come in at plus or minus $0.102; we expect CASM ex-fuel to come in at plus or minus $0.065, given lower capacity growth than in 2015, and with respect to fuel, we're assuming for the year an effective price per gallon including into-plane and net of hedges of approximately $2.05. So as a result, we expect operating margins for 2016 to be in the range of 10% to 12%.
Thank you. And with that, we will open the call to some questions.
Operator
Thank you. Our first question comes from the line of Hunter Keay with Wolfe Research.
Your line is open. Your question, please?
Hunter K. Keay - Wolfe Research LLC
Hi. Thank you for taking the question and good morning, everybody.
Pedro Heilbron - Chief Executive Officer & Director
Good morning.
Jose Montero - Chief Financial Officer
Hi.
Hunter K. Keay - Wolfe Research LLC
Just to clarify, are you guys saying that you expect your RASM to be up on a year-over-year basis in 2016 just looking at 2Q, 3Q, 4Q in aggregate?
Jose Montero - Chief Financial Officer
Hunter, this is Jose here. I would say that RASM during the second half of the year will be slightly higher than 2015 second half RASM, and specifically Q3 2016 will be slightly higher than Q3 2015.
And then Q4 2016, we expect it to – or we're guiding for it to be, in essence, the same behavior it's had always as somewhat being slightly stronger than Q3 of the year. So therefore, you are – you will see an improvement in the Q4 RASM on a year-over-year basis.
But in essence, what we're seeing is that there is going to be an improvement in RASM for the second half of the year.
Hunter K. Keay - Wolfe Research LLC
Okay. So that implies like the first quarter is down I think, basically if I do my math right, about 10%, which seems like a pretty – a big sequential improvement in the rate of change given you're going to be coming off an exit rate of down like 20%.
So do you have anything on the books right now in the first quarter that gives you some degree of optimism about things getting less worse, or any visibility you have in the first quarter of next year? And then as a follow-up, can you give us any kind of data behind the underlying assumptions that you'll have and are using in the 2016 RASM guide?
Again, thank you for providing that. As it relates specifically to currencies, like what are you using for the Brazilian reais?
And anything you want to share with us would be very helpful. Thank you guys.
Jose Montero - Chief Financial Officer
Yeah. So I'll take the first part and I think Q1, you see a – the drop in Q1 year-over-year is not going to be steep.
I mean, it's still very preliminary. We don't have full visibility for the quarter.
From what we are seeing, the drop will not be as high as 20% as what you see during some of the quarters that we presented up to now in 2015.
Pedro Heilbron - Chief Executive Officer & Director
And it's Pedro here, Hunter. So, we're not building into our guidance an economic – an improvement in the economics of our region, we are expecting currencies to be stable, to stabilize, but we're not building in a dramatic improvement to the economies.
And what we feel, based on our past experience in Latin America is once things reach a stable level, even without improvement, we should see positive unit revenue improvement. However, again, we're guiding to lower unit revenues in the first half of the year.
And in Q3, we're only projecting a very, very slight, a very minor improvement; and then Q4, a small improvement over Q3, which is what we've seen in the past, not exactly what we are projecting for this year.
Hunter K. Keay - Wolfe Research LLC
Thank you very much.
Pedro Heilbron - Chief Executive Officer & Director
Thanks.
Operator
Thank you. Our next question comes from the line of Mike Linenberg with Deutsche Bank.
Your line is open. Your question, please.
Michael Linenberg - Deutsche Bank Securities, Inc.
Yeah. Hey, everyone.
Hey, I just – I have a question on your Embraer 190 fleet. I think you ended the quarter at 25, and I think, for some time, it had been constant at 26 and it now looks like that fleet starts to come down over the next few years.
And I'm just – I'm curious. Those planes aren't that old.
Why are you starting to get out of those airplanes when it seems like that that airplane would be the right airplane for you to do some sort of experimental flying or moving into new markets that you would want to lead with that type of aircraft in order to reduce your risk? Has that view changed or what's going on there?
Pedro Heilbron - Chief Executive Officer & Director
Yeah. Hi, Mike.
It's Pedro here. So we're not getting out of that fleet, but remember that we reduced our domestic flying in Colombia since a few years ago, and many of those aircraft were mainly to fly domestically between smaller Colombian city fares.
So we're adjusting the total number of Embraers, or let's say, right-sizing our Embraer fleet to better serve the rest of our international network. So, we will still have a significant 190 fleet.
We have great reliability with those aircraft. We're just right-sizing it.
Jose Montero - Chief Financial Officer
And by the way, these departures were operating leases that expired, so...
Michael Linenberg - Deutsche Bank Securities, Inc.
Okay.
Jose Montero - Chief Financial Officer
...therefore that's the reason...
Michael Linenberg - Deutsche Bank Securities, Inc.
I mean part of the reason why I was asking, gentlemen, is that, when I look at your load factors, you're, even in the peak times, you're in the mid-70s%. If we look at last quarter, I think you were sort of in the low-70s%, 73%, this quarter sort of 76% or so.
When I look at other carriers flying within Latin America or the U.S. carriers, they have significantly higher load factors.
And I don't know how much of that is truly a function of demand or the fact that, structurally, you have similarly sized airplanes feeding similarly sized aircraft. And a lot of times, with hub dynamics, smaller airplanes feed the larger airplanes.
And it's important I think because when you have lower loads, it's harder on the pricing side and it feels like to price up or to revenue manage. And again, when I see sort of what the competition is doing – and I'm not sure if structurally that's having some sort of negative impact.
So the E190 question kind of drove into that. Maybe my assessment of the market is completely wrong or not right.
Why are you so much lower load? I mean, is it all because of the economy, or are there other factors at play here?
Pedro Heilbron - Chief Executive Officer & Director
Well, Mike. This is Pedro here again.
Those are the load factor we've always had. So it's not something new and our load factors have been very stable.
And it's a factor of many things, including the fact that we have the most complete and strongest intra-Latin America hub with six daily banks (25:20), frequencies at all hours, which feeds on itself and it's not something that – we're always trying to maximize load factors at the expenditure of frequencies and service. So again, it's the way we've always operated the hub.
But having said that, we do have a number of markets that are very high load factor and require 737-800s, and then others where we fly the Embraers. And of course, there's going to be a few markets where the 800 has to fly even though the load factor is going to be lower, but that's the way you rotate aircraft and get the utilization.
So I think it's more than anything a factor of the type of hub we operate in the type of region where we do business.
Michael Linenberg - Deutsche Bank Securities, Inc.
Yeah.
Pedro Heilbron - Chief Executive Officer & Director
So we bring like a first-class, complete super-strong hub to a region that has never seen anything like it, and for that to be – to work that way, it works at 75% and 76% load factors. If we wanted (26:29) 80% load factors, we would be offering a different kind of product and we will not be as strong as we are.
Michael Linenberg - Deutsche Bank Securities, Inc.
Okay. That's super helpful, Pedro.
If I can just squeeze in one last one on your Venezuelan cash. As I recall, I thought the sort of burn-off rate was about $5 million a month, maybe $15 million a quarter or so.
This last quarter, it looked like it's down about $25 million. I don't know, maybe my numbers may be off.
Is that the number? Should we assume about $25 million a quarter or $15 million a quarter?
What's that burn rate?
Jose Montero - Chief Financial Officer
No, the burn rate still is about – there's still – there's timing in some of these items and some of these payments, but in general terms, I think it's fair to assume still a burn-off of about $5 million a month.
Michael Linenberg - Deutsche Bank Securities, Inc.
Okay. Great.
Thanks, Jose.
Operator
Thank you. Our next question comes from the line of Savi Syth with Raymond James.
Your line is open. Your question, please.
Savanthi N. Syth - Raymond James & Associates, Inc.
Hey, good morning. Pedro, thanks for the color you provided on Brazil and Colombia.
I was wondering if you could provide a little bit more granularity in that Brazil – so the load factors are improving but are yields then declining more? And then just also, just on Argentina and Venezuela, some of the other regions that have been a drag, are those improving or what are you seeing at kind of the regional level?
Jose Montero - Chief Financial Officer
So, this is Jose here, Savi. So, yeah, load factor for the quarter in Brazil was up quarter-over-quarter.
And of course some of this is driven by the fact that some of the reductions that we've made in terms of capacity have come in. Yields were slightly down, single digits down quarter-over-quarter.
But then again, it's a big drop versus last year. So PRASM quarter-over-quarter in Brazil was up in the high-single digits.
Pedro Heilbron - Chief Executive Officer & Director
Argentina, what I mentioned in the call has to do with IMF projections, but the Argentinean market has been fine this year for all airlines. It's been healthy.
It's been fine. But the IMF is projecting maybe a slowdown or a correction.
So that's why we mentioned it as part of the reason why the IMF is not projecting a stronger recovery for next year. But in terms of passenger demand right now and throughout 2015, it's been fine.
Savanthi N. Syth - Raymond James & Associates, Inc.
How about Venezuela?
Pedro Heilbron - Chief Executive Officer & Director
How about it? No.
Venezuela was doing better at the beginning of the year of 2015, then it got weaker during the mid part of the year, especially in the second quarter. And it seems to be slowly recovering again, but we'll know if it's going to get weaker again in the coming months.
It's really very, very hard to predict Venezuela right now. We sell only in dollars, but there's some local Venezuelan carriers that do sell in bolivars and have subsidized fuel also.
So that also affects a little bit the demand in some of our markets. So it's a hard to predict market.
But again, started strong, got slow in the middle of the year. It's doing fine right now and it's hard to forecast.
Jose Montero - Chief Financial Officer
I think quarter-over-quarter, Q2 to Q3 has been basically flattish in terms of the – at least the yield environment there. So, it's been pretty stable over the last several months.
Savanthi N. Syth - Raymond James & Associates, Inc.
And, Jose, just on your commentary on Brazil, if I recall right, Brazil is – third quarter is generally stronger than second quarter. So is that kind of commentary on Q-over-Q helpful or are you talking about fourth quarter versus third quarter?
Jose Montero - Chief Financial Officer
No. This is Q3 to Q2.
I mean, the thing is the commentary was based upon the fact that you're seeing the country still in the midst of this supposed continued worsening. So, what we're seeing is that Q3 indeed, overall on a PRASM basis, on a unit revenue basis, came up slightly better than Q2.
Pedro Heilbron - Chief Executive Officer & Director
But you're right. I mean, usually a third quarter is very strong in Brazil and we didn't see that this year.
Jose Montero - Chief Financial Officer
Yeah. And Q4 will be down on a unit revenue basis in Brazil.
We expect it on a quarter-over-quarter basis. And again, as you know, Q4 is also a strong – seasonally strong quarter and what we're seeing right now is that the unit revenues there are go down versus Q3.
Savanthi N. Syth - Raymond James & Associates, Inc.
And that's all currency – is it because of the currency, the drop (31:36) you saw in September?
Jose Montero - Chief Financial Officer
I think it's mostly driven by that and by the macro environment.
Savanthi N. Syth - Raymond James & Associates, Inc.
Okay.
Pedro Heilbron - Chief Executive Officer & Director
I mean we sell in dollars, of course. Our international travel is sold in dollars, but the dollars have gotten that much more expensive that it's affecting yields and it's affecting the demand or vice versa.
Savanthi N. Syth - Raymond James & Associates, Inc.
Makes sense. And then the last question that's tied to this is as you look at where you're growing your capacity next year, do you expect the kind of mix, the country mix, to change or your revenue mix in the various countries to change?
Pedro Heilbron - Chief Executive Officer & Director
We're hardly growing capacity next year. Most of our growth, around 80%, is the full-year effect.
And much of the difference is gauge, is replacing Embraers with 737-800s. So in terms of new frequencies and markets, it's very little what we're doing next year.
So the mix will remain pretty much the same.
Savanthi N. Syth - Raymond James & Associates, Inc.
All right. Great.
Thank you.
Jose Montero - Chief Financial Officer
Thanks, Savi.
Operator
Thank you. Our next question comes from the line of Helane Becker with Cowen & Company.
Your line is open. Your question, please?
Helane Becker - Cowen & Co. LLC
Thanks, operator. Hi, guys.
Thanks for taking the time. Just a couple of updates.
One is on the fleet. You guys have a pretty big aircraft order coming in a few years.
And I just kind of wondered. You mentioned that you deferred two aircraft and I kind of wondered what you were thinking about that, A.
And B, I'm kind of wondering how you're thinking about financing it given that you guys are generally big users of the Export-Import Bank of the U.S. and it's closed for now.
Pedro Heilbron - Chief Executive Officer & Director
Yes, Helane. This is Pedro, first, then I'll let Jose answer the second part.
Our 737 MAX aircraft, which we start receiving in the second half of 2018 – well, I'll start with the NG, so the current Boeing NGs, we've shown so far total flexibility in adjusting our fleet to market conditions. So this year, we're growing only two aircraft.
Next year, it's going to be just one. And we still have more flexibility if we want to adjust that and return additional aircraft or sub-lease additional aircraft.
At the same time, we can renew leases if we see the demand coming back and grow faster than what we're projecting right now. So we have, again, total flexibility to go from negative to zero to positive growth, and there's a wide range there.
So, we feel very good about the way we have structured our fleet, especially in the future. In terms of the big order, and the MAX aircraft that starts coming in, in the second half of 2018, we will retain that flexibility.
And if we take into account fleet expirations in the coming years, we could keep growth very even, very low, almost at zero if we wanted. That's not the plan, but that's the flexibility we have.
And at the same time, we would be replacing older aircraft with much more efficient new MAX aircraft. So, again, we feel very good about the MAX order, and it gives us the flexibility, and it's going to make us more profitable in the future, too.
I'll let Jose answer the second part.
Jose Montero - Chief Financial Officer
So, hi, Helane. And in terms of financing, over the last couple of years, we've actually done – most of the transactions have been either sale leaseback transactions or JOLCO transactions, these Japanese operating leases with call options, and they've come in at comparable economics to us.
And there are other alternatives out there besides EXIM, there are double APCs (35:32) and commercial loans. But I just want to say that we do believe that EXIM is by a way, a good thing and it should – for whatever that's worth, I think that it is not necessarily – I don't know, I think from the political standpoint, EXIM should be good for the U.S.
But in any case, we have a lot of other alternatives for financing aircraft.
Helane Becker - Cowen & Co. LLC
Okay. Good.
And then can you just update us on the airport and how the construction is coming?
Pedro Heilbron - Chief Executive Officer & Director
Yes. Pedro, here.
And the airport, I think we spoke about it during the last earnings call. They slow down quite a bit, almost stop the construction to make a number of changes to the design of the airport.
The airport has some – the new airport, the new terminal 2, has some design issues that have now been fixed and which are going to result in a much better hub once it's inaugurated. But all those changes, all the improvements, et cetera and the slowdown in the construction means that for all of next year and probably until the end of 2017 or before that it won't be ready.
So the airport – the second terminal is going to be ready by the end of 2017. That's kind of how we see it right now.
Helane Becker - Cowen & Co. LLC
Okay. Great.
Thanks for the update. I appreciate it, guys.
Jose Montero - Chief Financial Officer
Thanks a lot.
Pedro Heilbron - Chief Executive Officer & Director
Thank you.
Operator
Thank you. Our next question comes from the line of Duane Pfennigwerth with Evercore ISI.
Your line is open. Your question, please.
Duane Pfennigwerth - Evercore ISI
Hey. Thanks for the time.
I just want to clarify. There was a lot of conversation around 4Q.
But just to repeat back what you're saying, 4Q unit revenue is going to be below 3Q level, which implies a larger year-to-year decline in RASM, is that true?
Jose Montero - Chief Financial Officer
Yes. So the fourth quarter unit revenues are going to be lower than the third quarter unit revenues.
Now the other thing that you have to include I think in the calculations is that our CASM ex-fuel is going to be somewhat higher in the fourth quarter because of timing of expenses. So I think those are the two items I think there we need to note.
Duane Pfennigwerth - Evercore ISI
Okay, thanks for that clarification. And then looking further on, can you just remind us what percent of your cost structure is non-USD?
And as we think about your cost structure into 2016, the currencies that you serve have sort of been weaker throughout the year, so we are ending on a weaker rate than we started. And that implies that, on average, they're going to be weaker in 2016 than they were in 2015 based on what we know today.
So it feels like you should get some benefit on the non-fuel cost side into 2016. I'd appreciate any commentary you have there.
Jose Montero - Chief Financial Officer
Yeah. I think, yes, south of 40% of our costs are non-USD denominated.
Having said that, there are some – so it's not as high as they might seem because there are some of these international fares for – or flights, et cetera are all dollarized in the region. But, I'd say that there is some upside depending on how the full year effect occurs in 2016 for that, but an items to note as well in the $0.065 that we have for extra CASM for 2016 is – we are growing at a lower rate.
And so therefore – and as a matter fact from – just simply from the number of ASMs that we are producing in the year, it is essentially or a number of, let's call it, almost to essential block hours in the first half of the year are going to be basically the same that we're going to have in the latter part of 2015. And as Pedro mentioned before, 80% of the growth that is cooked into the 3% is simply just full-year effect of 2015 growth.
Duane Pfennigwerth - Evercore ISI
Okay. Thank you.
Jose Montero - Chief Financial Officer
Thanks a lot, Duane.
Operator
Thank you. Our next question comes from the line of Leandro Fontanesi with Bradesco.
Your line is open.
Leandro Fontanesi - Bradesco S/A CTVM
Hi. Good morning.
Just like to understand better the share repurchase program. So, in the quarter, you acquired – so you paid $100 million and you received 500,000 shares.
And then you're going to receive additional shares for the remainder of the year. But I mean we would have to understand what was the implicit price of these 500,000 shares to kind of get a sense of how many shares can you additionally receive.
So can you comment about that?
Jose Montero - Chief Financial Officer
Yeah. It's an ongoing program, so that price has not yet been settled.
So, it will be settled during the fourth quarter, the total price for the transaction or for per share – on a per share basis. So, it's not something that – it is floating depending on how the VWAP of the CPA price behaves during the time period.
So our first – the program started back in, as I mentioned, during the middle part of the third quarter and it will go on into the latter part of the fourth quarter.
Leandro Fontanesi - Bradesco S/A CTVM
Okay. And what do you plan to do with the shares?
I mean you have a stock option plan. Do you plan to fund the stock option with – stock option plan with the shares that's going to be held in the treasury, or do you plan to cancel the shares?
Jose Montero - Chief Financial Officer
No. It's just – they're going to be booked as treasury shares.
Leandro Fontanesi - Bradesco S/A CTVM
Okay. Okay.
Thank you.
Jose Montero - Chief Financial Officer
Thanks a lot.
Operator
Thank you. Our next question comes from the line of Márcio Prado with Goldman Sachs.
Your line is open.
Márcio Prado - Goldman Sachs do Brasil CTVM SA
Yeah. Hi, everyone.
Thanks for the call. Two questions.
One is still on the guidance for particularly 2015. We still have a very wide EBIT margin for the full year, like 11% to 12%, and the fact is we have already three quarters published.
So, I would just like to understand why – so why, because that means that 4Q is very uncertain. You guys have been mentioning that, particularly in Brazil, you should be lower on a quarter-over-quarter basis.
And then if you could connect that with 2016 guidance, which you already have EBIT margin back to 10% to 12%. So I mean, if you reach the bottom of the guidance for 2015 that would basically mean kind of a V-shaped recovery in 2016.
So, if you could just comment on how uncertain 4Q is still for Copa, that's the first question. And a second one, if you'll allow me just to follow-up on the buyback program.
If, going forward, this could be a better strategy for the company with regards to the dividend distribution like for 2016. If you could rely more on buyback programs instead of keeping the minimum dividend payout.
Thank you.
Pedro Heilbron - Chief Executive Officer & Director
Okay. This is Pedro.
I'll start with the margin and maybe Jose can also comment some more on the margin and then talk about the buyback. But first of all, I would say that I don't know if I agree with your first statement in the sense that the 11% to 12% guidance for the year 2015 is not a wide margin.
I mean, it's pretty tight. It's 11% – we could give you an exact number.
We could say anything between 11% and 12%, but we know that it's not going to come exactly at that number. So we think – and that's why we give you a plus or minus and an 11% to 12% in every other item of the guidance.
But I think there's enough certainty that that's the range, and you can pick where you want to be in the range, but it's not going to be far from there. And again, I don't think that's uncertain or there's a wide range, but we still have to close the year.
December has to happen. There could be adjustments.
Who knows? So we think it's right to give you that range.
In terms of 2016, we are projecting – as I mentioned before, we're – it's early. It's very preliminary.
It's very early. Advanced bookings don't show what's going to happen in 2016.
We only get a few months of visibility there. Plus, there's a lot still to happen in terms of currencies and economies to see they're going to be stable, as we expect, that the IMF is expecting.
They're expecting a modest improvement. So, still early.
So we're being careful with our unit revenue guidance. We are not projecting a V-shaped recovery or anything like that.
We are, for example, as I mentioned before, implying in our guidance a very, very small recovery in the third quarter. And the fourth quarter that follows, not the first quarter of this year, but the fourth quarter of next year of what we are projecting, which is again is a slight improvement.
And we need to also keep in mind that we're coming off a year 2015 where yields have collapsed. You could think – if you look at how well we're doing with like nearly 20% lower yields is not normal.
So, the base is very, very low, and the base is not going to be our new normal. No way.
But we're not being crazy with our guidance or assumptions right now. I'd let Jose talk about the rest.
Jose Montero - Chief Financial Officer
Yeah. So, talking again about the share repurchase program, I think one thing I can say is that we will have completed half of the program by the end of the year.
And so the board has not given us a set timeframe for completing the program, and so it's continuing on as we had mentioned previously. And in terms of our dividend policy, I think that the current dividend policy that we have of a payout of 40% of reported net income of prior year, you can expect that that policy will continue going forward.
Márcio Prado - Goldman Sachs do Brasil CTVM SA
Thank you, Jose. Thank you, Pedro.
Just certainly 11% to 12% is a tight margin. What I meant is that given that we have like nine months accumulated, then when we make the sensitivity in 4Q, we still have a lot of possible variation, but certainly 11% to 12% for the year is not a wide margin.
Thank you.
Pedro Heilbron - Chief Executive Officer & Director
Yeah. Okay.
Thank you. I agree.
Thank you.
Operator
Thank you. Our next question comes from the line of Ravi Jain with HSBC.
Your line is open.
Ravi Jain - HSBC Securities USA, Inc.
Hi. Good morning.
I had a quick question on – just like to hear your thoughts on the competitor moves. We have seen some Latin American carriers adjusting their domestic capacity and trying to increase frequencies in Central America and Caribbean and we also have seen some U.S.
airlines trying to do that. Is there a risk of this let's say point-to-point being over-flown?
And how do you see the hub model of Copa in this environment where everybody else is trying to adjust their fleet? Thank you.
Pedro Heilbron - Chief Executive Officer & Director
Yeah. Well, there has been some of that going on of course.
And it would not have had, I think, a great impact if the economies and currencies have been strong or stronger. But when you combine additional competitive capacity and actually faster growth versus previous year with a weak economy and weak currency, it's kind of like a perfect storm.
And I think in a way it's part of the reason why yields in Latin America have decreased so much. But it's something that we need to expect that it's going to happen over time, and our hub model is very, very strong, very, very viable and valid, and we're very, very bullish on how well it's going to perform in the future, in spite of what other competitors are going to do.
I mean, they have the right to do whatever makes sense to them. And we do not expect that to be any different.
And our load factors are still pretty much there. But of course, when there is more capacity and weaker economies and weaker currencies, you're going to see yields getting hit which is what we've seen.
We feel that once there's more stable currencies, as we mentioned before, but also as competitive capacity also stabilizes, we should see yields recuperating. And again, our hub is number one, in frequencies, in destinations, and we're going to work hard for that not to change.
And our geographic location will not change. Geography was done many years ago and unless someone invades us and take over the country, and that's not going to happen, this is our geography.
So we feel we still have that advantage. And even though there is and there will be more competition, the hub is very, very relevant and very valid for the future.
Ravi Jain - HSBC Securities USA, Inc.
Thank you. That's helpful.
Jose Montero - Chief Financial Officer
Thanks a lot, Ravi.
Operator
Thank you. Our next question comes from the line of Dan McKenzie with Buckingham Research.
Your line is open.
Dan J. McKenzie - The Buckingham Research Group, Inc.
Hey. Good morning, guys.
Thanks. Pedro, how much of the 2016 guide embeds a boost from the Olympics?
And separately, the introduction of a premium economy product, if that's still the plan to begin rolling that out next year.
Pedro Heilbron - Chief Executive Officer & Director
Okay. So no, it's zero boost from the Olympics.
We have not – we have basically ignored the Olympics in our projections for next year. And one of the reasons for that is that we are not expecting – we will transport some official delegations from smaller countries, but we're not expecting a lot of fans to travel from Latin America to Brazil.
So it's not in our projections.
Dan J. McKenzie - The Buckingham Research Group, Inc.
And then the premium economy product?
Jose Montero - Chief Financial Officer
Premium economy.
Pedro Heilbron - Chief Executive Officer & Director
Okay. Sorry.
Yeah, premium economy. So we mentioned during our investors meeting here in Panama that in a list of all the things that we could do in the future to improve ancillary revenues, to improve the product, but we never said that it was actually planned for.
So, I would say that that's not something that we're planning to do, at least not for 2016. Could it happen later?
Of course. It's something that's there and that we would analyze, but it's not in 2016.
But there are other things that can boost and that will be boosting our results for next year. For example, our hedges, our fuel hedges are going to cost us less.
FFP, the new ConnectMiles, is going to produce more. So some of that is already taken into account in our guidance, and those are all good guides versus this year.
But maybe there could be some surprises there. Let's hope so.
Dan J. McKenzie - The Buckingham Research Group, Inc.
Yes, very good. Okay.
Well, second question here. Jose, based on what I'm seeing, it looks like Copa could borrow $500 million and the leverage metrics would still look impeccable, and at the same time, with the stock where it is, retire 25% of the shares outstanding.
And we are seeing at least one of the U.S. airlines take that approach.
And so I appreciate the commentary around the accelerated stock buyback. But what's holding you back here from perhaps being even more aggressive?
And I'm sort of characterizing or putting in context the fact that I agree with Pedro's characterization here that the revenue backdrop is not the new normal.
Jose Montero - Chief Financial Officer
Yeah. So, Dan, there are a couple of things there.
As I mentioned, we have been, we believe, pretty – we've been acting in the share repurchase program that's approved by our board. I'd say there are a couple of items that I've mentioned, one is that we do have some commitments over the next couple of years, pre-delivery deposits with aircraft manufacturers, et cetera.
And to be honest, we really do value having the strong fortress balance sheet that we do have. And we, at time periods such as this, want to ensure that we conserve our cash and continue having the strongest balance sheet that we can.
So that's something that we really do value very much. And so if the opportunity arises, who knows.
But for now, our aim is to really ensure that we have a very, very strong balance sheet in these uncertain times.
Dan J. McKenzie - The Buckingham Research Group, Inc.
Okay. Thanks, guys.
Pedro Heilbron - Chief Executive Officer & Director
Thank you.
Operator
Thank you. Our next question comes from the line of Stephen Trent with Citi.
Your line is open.
Stephen Trent - Citigroup Global Markets, Inc. (Broker)
Hi. Good morning, gentlemen, and thanks for taking my questions.
The first is actually kind of a follow-up on Ravi's question from earlier. Any color with respect to activity in the second airport in Panama?
Forgive me, the one that used to be U.S. Air Force based with what you might be seeing in VivaColombia's build out as I believe your former colleague Joe Mohan still works with them.
And have you seen or heard anything with respect to news stories saying that VivaColombia is planning to establish ops in Costa Rica?
Pedro Heilbron - Chief Executive Officer & Director
Yeah. Well, there hasn't been much change there.
They have the two flights they've been flying for over a year from Medellín and Bogotá to Panama. It's -they have a small market share and it's just two routes.
I mean it doesn't really have a big impact on what we do, or on our business. And I know they're putting something together in Central America – the intra-Central America markets are well served and not that huge.
But I'm not exactly aware of what they're planning. Maybe they're going to fly from there to the U.S., maybe there's a market there for them.
But we don't really participate in that kind of Central America to the U.S. or Costa Rica to the U.S.
market. We're not big players there.
So, right now we don't see anything that's of great concern to us. But obviously, we are on top of things and we would be very much on top of whatever they do.
And we will react accordingly and use our strength in any way that makes sense.
Stephen Trent - Citigroup Global Markets, Inc. (Broker)
Great. I appreciate that, Pedro.
And just one other question that's not exactly directly related to you guys. Any noise or concern on your part with respect to the Nicaraguan government recently approving the environmental license for a canal?
Pedro Heilbron - Chief Executive Officer & Director
No, not really. I mean, there is so much that needs to happen in terms of raising capital, the time it's going to take, but the whole thing.
That is not really something we're thinking about right now. If we were running the Panama Canal, maybe we would be a lit bit more concerned but we are not.
Jose Montero - Chief Financial Officer
Just a point of reference that just the expansion of the current Panama Canal has taken 10 years. So, imagine building a whole new canal, I mean, it's not an easy project.
It's a longer distance. It's in a more complicated difficult geography so.
Pedro Heilbron - Chief Executive Officer & Director
But we are very excited about the new Panama Canal being ready for its inauguration early 2016. We think it's going to bring further growth and prosperity to Panama and more logistics business.
So we're very excited about that, I should add.
Stephen Trent - Citigroup Global Markets, Inc. (Broker)
Got it. Very helpful.
And just one last question, if I may have missed it. Are you saying in 2016, that you are expecting Latin currencies to remain stable around the current levels?
I wasn't sure if I caught that correctly.
Jose Montero - Chief Financial Officer
Yeah. That's basically the assumption.
Stephen Trent - Citigroup Global Markets, Inc. (Broker)
Okay. Got it.
Well, thanks, guys. I'll leave it there.
Pedro Heilbron - Chief Executive Officer & Director
Thank you, Stephen.
Operator
Thank you. Our next question comes from the line of Bruno Amorim with Santander.
Your line is open. Your question, please.
Bruno Amorim - Santander CCVM SA
Hi. Hello, everyone.
So, I have a follow-up question on Márcio's question actually. Your guidance for the next year of 10% to 12% EBIT margin implies some improvements versus third quarter.
This year third quarter, in third quarter, you delivered 9% EBIT margin, and third quarter is one of the strongest quarters of the year. So on an annualized basis, you are earning, let's say, a little bit less than 9%, let's say 8%.
So, the 8%, which is the running rate, compares to 10% to 12% EBIT margin guided for the next year. I just wanted to make sure I understood the assumptions behind this improvement.
So, your bet is basically that the currencies will stabilize and then you also will improve on the back of this. Is this correct?
Jose Montero - Chief Financial Officer
Yeah. I'd tell you that is correct, especially in the second half of 2016.
And especially in the fourth quarter of 2016, where we're assuming is that the fourth quarter is going to behave in line with how the fourth quarter has behaved historically for us. So that's kind of the way we're seeing it.
Pedro Heilbron - Chief Executive Officer & Director
But very small improvement, by the way, which is we mentioned before. And the other improvement, for example, just the difference in cost of hedges that's about a percentage point in margin and then the frequent flyer program, the benefits of this kicking in, that's another impact.
So, there are other things happening besides this slight improvement to revenues, which again is very slight.
Bruno Amorim - Santander CCVM SA
Okay. Thank you very much.
Pedro Heilbron - Chief Executive Officer & Director
And let's not forget that it's a preliminary – a very preliminary guidance. We're usually not that way off, that much off.
But in February, we'll be more precise.
Bruno Amorim - Santander CCVM SA
Perfect. Thank you very much.
Operator
Thank you. Our next question comes from the line of Pablo Zaldivar with GBM.
Your line is open. Your question, please?
Pablo Zaldivar - GBM Grupo Bursátil Mexicano SAB de CV Casa de Bolsa
Hello. Good morning.
Thank you for taking my questions. Just a couple of quick details.
I couldn't – I think I didn't get the idea correctly. On your accelerated share repurchase agreement, are you expecting to spend the complete $100 million by the end of the year?
Is that the current expectation?
Jose Montero - Chief Financial Officer
Yes. That is correct.
Pablo Zaldivar - GBM Grupo Bursátil Mexicano SAB de CV Casa de Bolsa
Okay, thank you. And the other question, could you disclose a little bit more the figures you are currently seeing on the loyalty program either in terms of costs, benefits or both, or is there no information available at this time?
Jose Montero - Chief Financial Officer
Well, I think historically, or in the recent past, we said that it was going to be – it was going to add about $20 million to our cost for the year. And what we're seeing up until now is that that's in line with what we are – we guided to earlier in the year.
And I think that in terms of the – how the program will perform, I think still too early to tell, the program has been on for three months only. For next year, again, we expect to have some benefit to the bottom line of the company.
So I think the benefits will come in line during 2016, and it should be positive to the P&L of the company.
Pablo Zaldivar - GBM Grupo Bursátil Mexicano SAB de CV Casa de Bolsa
Okay. Thank you very much.
That would be all from me.
Jose Montero - Chief Financial Officer
Thanks a lot.
Operator
Thank you. Our final question will come from the line of Renato Salomone with Itaú.
Your line is open. Your question, please.
Renato Salomone - Itaú Corretora de Valores SA
Yes, thanks, gentlemen. Pedro briefly touched on this point, but I'd like to clarify something about the CASM ex-fuel guidance.
In 2016, you won't incur the expenses related to the launch of ConnectMiles, like Jose just said, and the three aircraft lease returns were seen in the second half of the year. And if I'm not mistaken, these events add up to roughly $40 million or $0.02 at the CASM level.
If we also consider the translation tailwind from expenses in local currencies, even if South America stayed where they are, it seems that you're assuming quite a bit of pressure elsewhere when you keep CASM ex-fuel at $0.065. Is this correct or is there room for positive surprises at the unit cost level?
Jose Montero - Chief Financial Officer
So, let me start by saying that – Renato, this is Jose here – that next year we also have some aircraft that are coming off lease, and so that figure is in that guidance. So I don't think there's a major change in that.
And in terms of FFP, still you will get some expenses with the issuance of miles or accrual of miles in there. So, some of that is in there as well.
Pedro Heilbron - Chief Executive Officer & Director
Right. There would be partner benefits, additional partner revenue, so there'll be a benefit in the revenue side.
Jose Montero - Chief Financial Officer
Yeah.
Pedro Heilbron - Chief Executive Officer & Director
But the cost side will not change much.
Jose Montero - Chief Financial Officer
Yeah. So there is some upside there in terms of some of the currency or cost that we have in non-U.S.
dollar denominated cost. But for now, the fact that we're growing by such a short or such a small ASM amount for 2016, we feel comfortable – again, preliminarily, it's still a preliminary guidance with the $0.065 at this stage.
I mean by the way, Renato, let me just say – let me close by saying that we are of course very – we have a very, very low CASM ex-fuel already and we every single day work to lower it. So, we have in place measures that we are pursuing to ensure that the operational level and the quality, delivery of the product level to ensure that our CASM gets to the best level that it can be.
So we are not complacent with the $0.065. We're pursuing all the avenues that we can to continue to improve it as we've had over the last several years.
Renato Salomone - Itaú Corretora de Valores SA
Totally fair. Thank you very much.
Jose Montero - Chief Financial Officer
Thanks, Renato.
Pedro Heilbron - Chief Executive Officer & Director
Thanks.
Operator
Thank you. I'd like to now turn the call back over to our management for any additional remarks.
Pedro Heilbron - Chief Executive Officer & Director
Okay. This concludes our third quarter earnings call.
But before we go, I want to emphasize again that 2016, the guidance is preliminary. But obviously, we have embedded an improvement that we know are there like fuel, FFP, et cetera.
But the economies, we're not projecting great improvement, same with unit revenue. I think it's rational what we have there.
But we'll know in February. We'll know much better what to expect in the year.
But what I do want to emphasize is that given our low unit costs, our superior network and the continuous efforts of our team, we certainly expect to deliver much stronger results once the currencies and economies of Latin America have stabilized. So, going forward, even beyond 2016, we see a lot of margin upside once these things get back to not normal, but on their way to being there.
So, anyway, thank you for being with us, and thank you for your continued support. Have a great weekend.
Operator
Ladies and gentlemen, thank you very much for your participation. This does conclude the presentation.
You may now disconnect. Everyone, have a wonderful day.