Nov 9, 2016
Executives
Raul Pascual - Copa Holdings SA Pedro Heilbron - Copa Holdings SA Jose Montero - Copa Holdings SA
Analysts
Savanthi N. Syth - Raymond James & Associates, Inc.
Helane Becker - Cowen and Company, LLC Richa Talwar - Deutsche Bank Securities, Inc. Renato Salomone - Itaú Corretora de Valores SA Pablo Barroso - Casa de Bolsa Credit Suisse Mexico SA de CV Pablo Zaldivar - GBM Grupo Bursátil Mexicano SAB de CV Casa de Bolsa Hunter K.
Keay - Wolfe Research LLC Stephen Trent - Citigroup Global Markets, Inc. (Broker) Rogério Araújo - UBS Brasil CCTVM SA Dan J.
McKenzie - The Buckingham Research Group, Inc. Duane Pfennigwerth - Evercore Group LLC Ravi Jain - HSBC Securities USA, Inc.
Renata Stuhlberger - Goldman Sachs do Brasil CTVM SA Leandro Fontanesi - Bradesco S/A CTVM
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 a question-and-answer session.
As a reminder, this call is being webcast and recorded on November 9, 2016. Now, I will turn the conference call over to Raul Pascual, Director of Investor Relations.
Sir, you may begin.
Raul Pascual - Copa Holdings SA
Thank you very much, Fermin, 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 - Copa Holdings SA
Thank you, Raul. Good morning to all and thank you for participating in our third quarter earnings call.
I first want to congratulate all of our co-workers for the efforts during this quarter. Their dedication and commitment keeps us at the forefront of Latin American aviation.
During the third quarter, we saw a clear improvement versus 2015 and the first half of 2016, and believe that the worst is behind us. We're still operating in that soft yield environment, but the year-over-year gap is narrowing.
And with a visibly stronger demand environment and more stable Latin American currency, we believe it's only a matter of time until we see strengthening yields. Furthermore, during the quarter, we delivered the highest quarterly load factor in Copa's history, completely offsetting the yield softness and producing higher unit revenues year-over-year for the first time in two years.
This was achieved, in large part, through a disciplined capacity approach and better commercial execution. As always, we also maintained industry-leading unit cost while continuing to deliver the excellent and reliable product our passengers have become accustomed to.
Among the main highlights for the quarter, our unit revenues increased nearly 2% year-over-year, driven by an 8 percentage point increase in load factors. Our yields are still down about 8% year-over-year, but the gap has narrowed significantly.
We achieved lower unit cost. Lower fuel prices drove CASM down 3% from $0.092 to $0.089 and our CASM ex-fuel improved about 1% year-over-year to $0.064, one of the lowest among full-service airlines and an outstanding achievement in a low growth year.
This resulted in an operating margin of 13.6% for the quarter, up 4.3 percentage points from third quarter 2015. Also, keep in mind, our operating results include considerable realized fuel hedge losses.
In fact, excluding the impact of these hedges, our operating margin would have come in more than 4 percentage points higher to over 17%. On the operational front, we delivered on-time performance of 90.1% and a completion factor of 99.8%, once again placing us amongst the best in the industry and even more impressive when considering the record load factors achieved during the quarter.
Looking at the remainder of the year, in the fourth quarter, we are seeing a continuation of improving demand trend and expect to deliver higher year-over-year unit revenues. However, we have seen an increase in fuel costs early in the quarter, which could put some pressure on fourth quarter unit costs.
Based on our recent performance and given the visibility for revenues and cost for the rest of the year, we're updating the full year operating margin guidance to a range of 12% to 13%. In terms of fleet, during the quarter, we returned two leased Embraer 190 and expect to end 2016 with 99 aircrafts, one less than at the end of 2015.
In 2017, we will receive two Boeing 737-800 and return one more Embraer 190 for a net growth of one aircraft. As we have previously shared with you, we have developed a plan that should drive our operating margins back to the high-teens during the next couple of years by means of several initiatives and actions.
The most important of these actions being the rolling-off of out of money of fuel hedges that has cost additional expenses of close to $200 million over the past two years; the upgrade of our reservation system platform, enabling us to offer ancillary products without eroding the quality product our passengers have become accustomed to; the implementation of cost saving initiatives, which we expect will generate sustained savings across many areas of the company; the improvement in our commercial execution to better serve a more dynamic demand environment; and, as we announced recently, the introduction of a new business model in Colombia, to more effectively serve our domestic and out-hub network. These initiatives should help us achieve and maintain higher margins even in a soft demand environment.
Notwithstanding, we expect the Latin American economies to start recovering in 2017. So, there should be additional upside on that front as well.
In terms of our Colombian operation, I'm very proud to mention that on October 20, we announced the launch of Wingo, a low cost, low price option for travelers looking for a simple no frills travel experience. Wingo will start flying on December 1, with four newly configured Boeing 737-700, and its operation will encompass our domestic Copa Colombia route, existing international routes from Bogota to non-Panama hub destinations and select routes to and from Panama Pacifico Airport, one of the other two smaller international airports serving Panama City.
Wingo has an independent, exclusively dedicated commercial and planning team led by Catalina Bretón, a dynamic and knowledgeable airline executive with experience in the low-cost model as well as the Latin America region. Although truly a low cost operator, Wingo will also benefit from Copa's economies for scale and operational support.
To summarize, in terms of the demand environment, we believe the worst is already behind us. We've been able to increase load factors and totally offset the ongoing softness in yields through a very proactive and disciplined approach to capacity as well as other commercial actions.
Our team continues to deliver world-class operational performance while achieving industry-leading unit costs. We're focused on executing several initiatives that are aimed at increasing our margins.
And lastly, we're as confident as ever in our business model and our financial position. We have the strongest network for travel within the Americas, an extremely flexible fleet plan, the lowest unit cost, a very strong liquidity position with low leverage and a highly committed team.
Now, I'll turn it over to Jose, who will go over our financial results for the third quarter in more detail.
Jose Montero - Copa Holdings SA
Thank you, Pedro, and good morning, everyone. Thanks again for joining us.
I want to join Pedro in congratulating our entire team and particularly, highlighting focus, discipline and success in controlling our costs, which are a strong component of our company's corporate culture that have led us to continue delivering strong results. During the quarter, revenues increased 4% year-over-year to $569 million.
Yields were still under pressure coming in 7.6% lower than Q3 2015. However, as expected, the year-over-year gap in yields has narrowed significantly.
We continue our capacity discipline strategy and grew only about 2% year-over-year for the quarter. Leveraging on a better demand environment and through better commercial execution, our revenue passenger miles increased 12.7% year-over-year for the quarter, resulting in 8 percentage point increase in load factor, which averaged a very strong 84.2% system-wide, our highest quarterly load factor ever.
Due to this increase in traffic, our unit revenues came in at $0.103, 1.8% better than Q3 2015. Our third quarter operating expenses decreased 1% year-over-year and our cost per available seat mile decreased 2.9% to $0.089 from $0.092 in the third quarter of 2015.
The lower CASM year-over-year was driven mostly by a 5.9% reduction in jet fuel expense and a reduction in the other operating expense line, driven mainly by reduction in non-cash costs related to the launch of ConnectMiles in 2015. For the quarter, our CASM ex-fuel came in 1% lower year-over-year at $0.064, especially good given the small capacity growth of only 2%.
These excellent results are a reflection of our continuous work on our cost savings initiatives. As you can see, the reliable delivery of our product with low unit cost continues to be one of our company's main focus areas and core strength.
In terms of operating results, consolidated operating (11:21) for the quarter came in at $77.2 million, representing an operating margin of 13.6%, 4.3 percentage point expansion over the 9.2% achieved in the third quarter of 2015. It is important to highlight that these results include the significant negative effect of realized fuel hedge losses.
Excluding these realized hedge losses, our operating margin for the quarter would have been 17.5%, closer to our recent historical average, excluding hedges, of 19%. In terms of net results, net earnings for the quarter came in at $74 million or earnings per share of $1.75.
When excluding extraordinary items, mainly the realized the fuel hedged market-to-market gain of $19.2 million, underlying net income for the quarter came in at $55.3 million or earnings per share of $1.30, compared to last year's third quarter underlying net income of $37.4 million or adjusted earnings per share $0.85. With respect to fuel hedges, we haven't taken any new positions since July of 2015.
For the third quarter, we had coverage for 32% of our projected volume, which resulted in a realized loss of $22.2 million. For the fourth quarter of 2016, we have hedged 35% of the projected volume mainly using jet fuel swaps at an average equivalent price of $2.40 per gallon.
So, we continue to expect significant negative fuel hedge effects for the fourth quarter of this year. For 2017, our position remains unchanged with less than 6% of the projected volume covered with jet fuel swaps with an average price per gallon of $1.80.
Turning now to the balance sheet. Assets totaled $3.8 billion at the end of the quarter.
Owners' equity totaled approximately $1.8 billion, debt plus capitalized leases totaled $2.1 billion and our adjusted net debt-to-EBITDA ratio improved to 2.6 times, which continues to be the lowest in our period. In terms of debt, we closed the quarter having reduced our bank debt to approximately $1.2 billion, about 60% of which is fixed-rate with a blended rate including fixed and floating rate debt of approximately 2.7%.
Looking at cash, short and long-term investments, we closed the quarter with $773 million, which represents approximately 36% of last 12 months' revenues. In terms of fleet, we've already taken delivery of the one new Boeing 737-800 that we had scheduled for the year and returned two Embraer 190s to end the year with a fleet of 99 aircraft, 64 737-800s, 14 737-700s and 21 Embraer 190s, a decrease of one aircraft compared to the fleet at the end of 2015.
Finally, as per company policy on December 15, we will pay our third quarter dividend in the amount of $0.51 per share to shareholders of record as of November 30, 2016. Going back to our result and to recap, the region is seeing a healthier travel demand environment.
We continue delivering leading unit costs and continue to look for further efficiencies and we have a very flexible fleet plan which has allowed us to match our capacity to a change in demand environment and we continue having one of the strongest balance sheets in the industry. In terms of our guidance for full year 2016, based on our latest assessment of the demand environment and fuel prices, we're updating our 2016 full year guidance as follows.
We're narrowing our capacity growth in terms of ASMs to plus or minus 1.5%. We're increasing our load factor to plus or minus 80%.
We're increasing our RASM guidance to plus or minus $0.10. We're maintaining our CASM ex-fuel guidance to plus or minus $0.064.
We're also increasing our fuel price assumption for the year to an effective price per gallon of $1.83 including into-plane and net of hedges. And with respect to our operating margin, we're narrowing our guidance to a range of 12% to 13%.
Today, we're also providing preliminary guidance for 2017 based on our operational plan and expectations for air travel demand. Keep in mind that our visibility as of now is still very limited.
Our capacity in terms of ASMs is expected to grow by approximately 5% and operating margin for full year 2017 is expected to be in the range of 15% to 17%. That's assuming an effective price per gallon including into-plane and net of hedges of approximately $1.80.
Thank you. And with that, we'll open the call for some questions, followed by closing remarks from Pedro?
Operator
Thank you. And our first question is from the line of Savi Syth with Raymond James.
Please go ahead.
Savanthi N. Syth - Raymond James & Associates, Inc.
Hey, good morning. On the – at the Investor Day, you outlined cost initiatives and I was wondering if you could talk about maybe how much of that roughly sort of $50 million you're targeting was achieved in 2016 and may be what that progression might be in 2017, 2018?
Jose Montero - Copa Holdings SA
Yeah, Savi, this is Jose here. Our projection is for approximately half of the savings to be completed during 2016 and then a run rate of $50 million worth of savings around that during 2017.
Savanthi N. Syth - Raymond James & Associates, Inc.
Okay, great. And then on the – on Wingo, if I may ask, earlier, you shared a lot of details, but I was wondering specifically, what characteristics were in the decision process on which route to introduce Wingo on.
And then also, just your thinking behind the 737-700, given that maybe the 737-800 has a closer or higher density dynamic to some of the other LCCs in the region?
Pedro Heilbron - Copa Holdings SA
Right. So this is Pedro, Savi.
So couple of things, the route network is very similar, 95% of what we have today, what Copa Colombia or Aero República is operating today. So we're introducing a different model to a network we're already operating.
We know the market. We know who are the passengers.
We're, in a way, over serving them with a high cost product and a high cost operation in what are mostly low yield leisure markets. So Wingo is going to solve that problem for the network we have today.
So we see it as relatively low risk, and we can deliver the low cost by changing the model and from a – and knowing that we come from a low cost operating base. In terms of the aircraft, yes, the 737-800 has a higher density, and thus, a lower per seat cost.
But it all depends on your load factor, the 737-700 had lower trip cost. These are 737-700s that are pretty much paid for.
So these are low cost 737-700s for us. And given our forecasted load factors, we do much better financially with a 737-700 and higher load factors than an 737-800 and lower load factors.
Savanthi N. Syth - Raymond James & Associates, Inc.
That makes sense. All right.
Thank you.
Jose Montero - Copa Holdings SA
Thanks.
Operator
And our next question comes from the line of Helane Becker with Cowen. Please go ahead.
Helane Becker - Cowen and Company, LLC
Hi, guys. Thanks, operator.
So here's a couple of questions for you. What's the CASM advantage of Wingo versus Copa?
Pedro Heilbron - Copa Holdings SA
Okay. It's Pedro again.
And the CASM advantage will come from direct distribution, a higher density on the aircraft and a no – I mean much lower onboard service cost. Those are probably the three more significant cost differences versus Copa.
It's also point-to-point, not connections, so there's also less complexity there that lowers the cost. The network compared to all of Copa is different, so making a CASM comparison once against the other would not be fair.
But what we have compared are the new Wingo CASM to any other LCC in the region Wingo is going to be operating and the CASM is the same or better.
Helane Becker - Cowen and Company, LLC
Okay. And then just a follow-up on the density, do the aircraft already have that higher density or do you have to actually put them through a modification program and what would the cost of that be?
Pedro Heilbron - Copa Holdings SA
Yeah, they were put through a modification program. And we did that in-house, including the painting and the cost was mainly the purchase of new seats.
We bought new HEICO high density seats and that's the difference. So it's not much more than $3 million, the cost of reconfiguring those for aircraft including everything, not only the seats but the downtime, the work, et cetera and that's CapEx of course.
Helane Becker - Cowen and Company, LLC
Okay. Yeah.
Okay. And then my other question is, with respect to the fleet for 2017, what do you – how many aircraft do you contemplate having in the fleet by the end of next year, by year end 2017?
Jose Montero - Copa Holdings SA
So, Helane, Jose here. Just kind of to summarize where we will end in 2016, we'll end with 99 aircraft this year.
And so next year, we have two deliveries, two 737 aircraft that are coming in, 737-800s and one Embraer operating lease that is expiring next year. So we'll end the year with a fleet of 100 aircraft.
Helane Becker - Cowen and Company, LLC
Okay. And does that include, I think you have four in – four 737s in Wingo?
Jose Montero - Copa Holdings SA
Yeah, that's including – the 100 airplane count includes the four aircraft in Wingo.
Helane Becker - Cowen and Company, LLC
Okay. Perfect.
And then just one last follow-up on the operating margin, Jose. You said 15% to 17%, but in the third quarter, ex the hedges, you would be already over 17%.
So is part of the lower, like I will think you would be sort of maybe in the 16% to 18% range for next year. So, as part of the lower end of the range, due to higher jet fuel costs, is that how I'm thinking about that?
Jose Montero - Copa Holdings SA
Yeah, there are couple of aspects there and you're right, Helane. Let me just start by saying that the guidance that we're providing for next year is still a preliminary guidance.
Your aspect that indeed fuel is considerably higher than on a ex-fuel hedges basis than what it was in 2016. Then the other thing, when you compare Q3 of this year, Q3 is seasonally the strongest quarter of the year.
So – and we're providing a full year average for next year as well.
Helane Becker - Cowen and Company, LLC
Okay. Fair enough.
Thank you. And Pedro, welcome back.
Glad you're feeling better.
Pedro Heilbron - Copa Holdings SA
I'm doing great. Thank you.
Operator
And our next question comes from the line of Mike Linenberg with Deutsche Bank. Please go ahead.
Richa Talwar - Deutsche Bank Securities, Inc.
Hey, everyone, it's actually Richa Talwar in for Mike. Good morning.
So...
Pedro Heilbron - Copa Holdings SA
Good morning.
Richa Talwar - Deutsche Bank Securities, Inc.
So, first, sorry to beat a dead horse here but on the Wingo operation, how large do you expect the business line to be. When do you expect it to be a profitable contributor to the business and how long do you think it'll take for that to fully mature?
Pedro Heilbron - Copa Holdings SA
Yeah. Well, the interesting thing with Wingo is that it starts off something, a base that already exists.
So I mean we need to shift passengers and its direct distribution and it's using a different code, but it's not starting out of zero, out of nowhere. And the other interesting thing is that it doesn't really need to be profitable, although of course, the plan is that it's going to be profitable.
But it doesn't need to be profitable to be successful because if we reduce Copa Colombia a domestic and ad hoc losses then that's again for Copa Holdings. So it only needs to be – to do better than the current domestic and ad hoc operation of Copa Colombia to be a positive contributor.
And we think that, by the second half of 2017, that will be the case. Wingo will be contributing in a positive way to Copa Holdings.
The immediate plan is those four 737-700s, kind of fixing the current network that I've just mentioned, and we'll take it from there as the opportunities come and Wingo develops and does well. We'll see what are the next steps.
So right now we're focused on replacing the network with those four aircraft.
Richa Talwar - Deutsche Bank Securities, Inc.
Okay. That was very clear.
Thanks, Pedro. And then second one on the connect mileage plan.
At your Investor Day, you suggested the loyalty plan should help boost company margins by an incremental 1 percentage point. Curious if that's baked into your 2017 outlook or do you really expect that tailwind to be fully realized in 2018?
Jose Montero - Copa Holdings SA
Yeah, Richa, this is Jose here. We see that more, anything in terms of accounting profit, that will most likely come in during the latter part of 2017 and maybe more of a 2018 accretion.
Richa Talwar - Deutsche Bank Securities, Inc.
Okay, great. And then if I could just – one more for fun.
How do you expect the outcome of the U.S. elections today or last night rather to impact your business for the country if at all?
Pedro Heilbron - Copa Holdings SA
We're expecting no impact on our business and that's like all I want to comment.
Richa Talwar - Deutsche Bank Securities, Inc.
All right. Thank you.
Pedro Heilbron - Copa Holdings SA
Okay.
Operator
And our next question comes from the line of Renato Salomone with Itaú. Please go ahead.
Renato Salomone - Itaú Corretora de Valores SA
Hi, Pedro, Jose. First question with the 5% ASM growth guided for next year.
Can we assume that aircraft utilization will converge back to 11 hours a day?
Jose Montero - Copa Holdings SA
Renato, this is Jose. Yeah, indeed.
The main source of growth in tertials for a (27:15) component of growth of the ASMs is aircraft utilization. There is also somewhat of a component related to gauge, but it's mostly aircraft utilization as you mentioned.
Renato Salomone - Itaú Corretora de Valores SA
Perfect. And a quick follow-up, on the growth, the 22% growth on reservations and sales, can you give us a bit more color on this growth, on this pressure here and what's, if there's any one-offs, and what's sustainable?
Jose Montero - Copa Holdings SA
I think it's a function of the increase in sales that we've had going forward and so I think it's certainly a – it's a function of kind of the recovering revenue environment that we're seeing. And higher load factors as well, and indeed, future bookings for the fourth quarter also drive this line.
Renato Salomone - Itaú Corretora de Valores SA
Perfect. Thank you.
Jose Montero - Copa Holdings SA
Yep.
Operator
And our next question comes from the line of Pablo Barroso with Credit Suisse. Please go ahead.
Pablo Barroso - Casa de Bolsa Credit Suisse Mexico SA de CV
Hi. Good morning, Pedro and Jose.
Pedro Heilbron - Copa Holdings SA
Good morning, Pablo.
Pablo Barroso - Casa de Bolsa Credit Suisse Mexico SA de CV
Just one quick question. On your preliminary guidance for 2017, you (28:38) 5% ASM growth.
Could you provide us more color in which market are you looking to add this capacity?
Jose Montero - Copa Holdings SA
Pablo, this is Jose here. Again, it's mostly related to aircraft utilization and full year effect of flights that we've started this year.
I don't necessarily see that there is a big difference or particular region where we are putting in more capacity than others.
Pablo Barroso - Casa de Bolsa Credit Suisse Mexico SA de CV
Okay. Thank you, Jose.
Jose Montero - Copa Holdings SA
Yep.
Operator
And our next question comes from the line of Pablo Zaldivar with GBM. Please go ahead.
Pablo Zaldivar - GBM Grupo Bursátil Mexicano SAB de CV Casa de Bolsa
Hello. Good morning.
Thank you for taking my question and congratulations on your results. Could you give us an update on how are you seeing the competitive environment and in terms of your capacity deployment and demand in your main markets, that would be Brazil, Colombia and Venezuela?
Pedro Heilbron - Copa Holdings SA
Yes. Okay.
This is Pedro, Pablo. So, in terms of a competition, it has been stable as of late and we don't see that changing.
So, the other airlines in our region are not adding a lot of capacity. It's hasn't really changed much from what we were seeing already in the previous quarter.
In terms of the two markets we mentioned, Colombia is improving, it has been improving year-over-year and quarter-over-quarter in terms of yields and PRASM. So, that market is doing better.
Venezuela, we've seen a little bit of improvement quarter-over-quarter, but it's worst year-over-year. It's actually much worst year-over-year, but it's not getting worse.
If at all, it's getting slightly better, but still below the year before.
Pablo Zaldivar - GBM Grupo Bursátil Mexicano SAB de CV Casa de Bolsa
Okay. Okay.
Thank you. And another question just quickly.
For this year, you have an average load factor guidance of roughly 80%. Do you believe this is a sustainable level going forward?
Jose Montero - Copa Holdings SA
So, Pablo, this is Jose here. We've been very active in capacity.
I think that the reasoning behind the 80% load factor I think is a function of how we've managed capacity and how we've approached kind of the environment. And ultimately, the important item that we optimize for is unit revenues or PRASM.
So, going forward, I think we'll make the best out of the circumstances, but the true aspect that we optimize for us is unit revenues in our business.
Pablo Zaldivar - GBM Grupo Bursátil Mexicano SAB de CV Casa de Bolsa
Okay. Thank you very much.
Pedro Heilbron - Copa Holdings SA
Thank you.
Operator
And our next question comes from the line of Hunter Keay with Wolfe Research. Please go ahead.
Hunter K. Keay - Wolfe Research LLC
Hi. Thanks.
Good morning.
Pedro Heilbron - Copa Holdings SA
Good morning, Hunter.
Hunter K. Keay - Wolfe Research LLC
Good morning, Pedro. Would you mind deconstructing the margin guide a little bit, the components of RASM and CASM?
And maybe within RASM load and yield, do you feel like at all doing that? And maybe to answer my own question a little bit here in advance, but is the rationale for not giving a RASM guide a function of you believing that oil prices are volatile?
And if they go up, you'll have a pretty good ability to pass it through pretty much dollar for dollar? Is that a right way of thinking about why the RASM guide wasn't included today?
Jose Montero - Copa Holdings SA
I think that, Hunter, it's a function of visibility in the future and, indeed, fuel has shifted across the last year. And so, we felt that it was better to issue those figures when we affirm our guidance for the full-year in February.
I'd say that, indeed, our – ultimately, the way that we approach this is we feel that (32:57) operate in, the currencies will appreciate and the currency or e-commerce will do well once the fuel price were to increase, but there's a lag in that. So, we didn't want to necessarily box ourselves into a unit revenue figure versus oil or versus other details such as load factor.
So, this is the way that we're approaching it, again, preliminarily but we're very confident in the way that we see 2017 right now.
Hunter K. Keay - Wolfe Research LLC
Okay, Jose. Thanks.
On the 5% capacity guide, has that come up or was there a baseline plan that was something that was much lower and would you care to bracket in how high or low that could go if things get better or worse? And then, last part of the question is, if you guys get back to where you want to be in terms of like the high teens margins, what's a good long-term capacity growth for you guys like in 2019 and beyond?
Thanks so much.
Jose Montero - Copa Holdings SA
I think the 5%, I think it is what it is, it's around there. I think that it's – there is – we've been I think very adept at gauging capacity in a very short-term basis, depending on how the markets perform.
But we're I think confident or comfortable with the 5% for now. In terms of the margins going forward, I'd say that, yeah, we're comfortable with the high-teen margins in 2018.
The aircraft growth that we have stated is I think for upwards of about six aircraft of growth. And ultimately I refer to what the kind of longer-term estimates mentioned for the region, which is a sustained kind of growth rate for air travel in Latin America of between 6% and 7%.
So, it is, I think that with that, you can argue that growth in the lows double-digits is not out of the question going forward.
Hunter K. Keay - Wolfe Research LLC
Thank you very much.
Operator
And our next question is from the line of Stephen Trent with Citi. Please go ahead.
Stephen Trent - Citigroup Global Markets, Inc. (Broker)
Thank you, operator. And good morning to you, gentlemen.
And Pedro, also glad you are feeling better. I was curious looking at what we've seen in the region, there has been speculation about M&A here and there; I know on Copa's side, I mean, way back when you guys acquired Aero República.
And when you think about the long-term trajectory for Copa, do you kind of see equal probability that Copa buys a stake in another airline or is it self-acquired or are you not really thinking at all in terms of either potential outcome?
Pedro Heilbron - Copa Holdings SA
Yeah, okay. Thank you, Stephen.
So, a few things. First, I think the most important is that, that our business model, it has been proven over time, that's sustainable on its own.
We're in the best geographic position. We have, by far, the best and strongest hub and we feel that with the partners we have, we can continue as we are right now, developing our business model without needing to merge or be acquired or anything.
So, we're not in a position similar to other carriers that need to look for a partner to strengthen their balance sheet – we have a very strong balance sheet – or because they need a strategic partner to move forward their business. We're not in that position.
We can go at it, continue going at it the way we've done it in the past. So, we're in a very comfortable position in that sense.
But we will never say never, we will never say never, and we're always going to look at interesting opportunities that might present along the way, and that's something we're always going to be open to. But, again, we have the comfort of not needing to do anything to be successful going forward.
Stephen Trent - Citigroup Global Markets, Inc. (Broker)
Very helpful, Pedro. And sticking with the rule about one follow-up and not to beat a dead horse here.
And a dumb question for my part, when I think about Wingo, is this at least somewhat analogous, for example, to what Air France does with Transavia, and Lufthansa with Germanwings? Is this kind of an opportunity for sort of incremental long-term economic profit?
Is that how we should think about Wingo?
Pedro Heilbron - Copa Holdings SA
Slightly different. And I can't say that I know the examples you mentioned well enough.
I know of them but might not know them well enough. But I would say three things that are important in the Wingo case, and in no specific order.
Number one is that Wingo can deliver (38:27) cost, because we have the efficiencies, we have the productivity, and we've always operated in a low cost manner, except for the fact that we're full service hub and spoke agency distribution, but Wingo is changing those things. So, we can deliver the cost.
Number two, which is very important, is that we have no restrictions. We have full flexibility to do whatever we want with Wingo and not like some of the other airlines you've mentioned that have all kinds of limitations and restrictions from labor, et cetera.
And number three is that we are reconverting an operation that we already have. So, we're not venturing out to try to reinvent the Wingo.
We're reconverting something that we've been operating for a while that we feel that Wingo can serve in a much more cost effective way.
Stephen Trent - Citigroup Global Markets, Inc. (Broker)
Okay. Got it.
I'll let someone else ask a question. Thanks again, Pedro.
Pedro Heilbron - Copa Holdings SA
Thank you.
Jose Montero - Copa Holdings SA
Thank you.
Operator
And our next question is from the line of Rogério Araújo with UBS. Please go ahead.
Rogério Araújo - UBS Brasil CCTVM SA
Hey. Good morning.
Thank you very much for the opportunity. Congratulations for these results.
Pedro Heilbron - Copa Holdings SA
Thanks.
Rogério Araújo - UBS Brasil CCTVM SA
My question is a follow-up on yields. If you could mention – you already talked about Colombia and Venezuela.
If you could mention how Brazil was important for this recovery. And if you could compare a little bit Brazil with Colombia, which one was better in terms of recovery and which one helped more your recovery in the third quarter?
And also, if we consider flat yields seasonally adjusted going forward, we already can get into the bottom of our guidance for 2017, so we don't need any further improvement in yields for Copa to be able to deliver its guidance in our calculations. My question is also what do you expect in terms of yields going forward?
If there's still recovery to come and in this case, if you can get upside risks to your guidance in terms of yields? Thank you.
Jose Montero - Copa Holdings SA
Yeah. Rogério, this is Jose.
I'd say Brazil has – we've seen kind of Brazil flattening out with the last quarter-and-a-half and the third quarter. From the yield perspective, on a year-over-year basis, slightly up, which is a good indication.
And it was slightly ahead of Colombia you'd say, but I think both of them ultimately performed reasonably well or at least recovered somewhat versus what we had seen in the quarter – the same third quarter a year ago. And in terms of going forward, I would say that we feel that there could be still some upside in the yield environment in the South American markets.
And I think that Brazil still has some upside for the end of the year, and for the beginning of next year, which is for what we have visibility.
Rogério Araújo - UBS Brasil CCTVM SA
Okay. If you look at your bookings right now, is it going to be a high – a good high season especially for Brazil in December, January?
Jose Montero - Copa Holdings SA
Yeah. I'll look at it from a standpoint of kind of the entire network.
And I think that you can expect the traffic in the network could be in line with recent traffic trends that we've shown.
Rogério Araújo - UBS Brasil CCTVM SA
Perfect. Thank you very much.
Jose Montero - Copa Holdings SA
Yes.
Operator
And our next question comes from the line of Dan J. McKenzie with Buckingham Research.
Please go ahead.
Dan J. McKenzie - The Buckingham Research Group, Inc.
Oh. Hey.
Good morning. Thanks, guys.
Jose, setting aside Brazil and Colombia, just international inbound bookings to Panama, in general, appear pretty strong. And so, my question here really is referencing alliance and partner revenue.
I guess, first, what percent of total revenue is this segment? And then secondly, how would you characterize this part of the business and/or what might be driving it?
Jose Montero - Copa Holdings SA
Dan, so, I won't go into necessarily the detail of how much we have in interline revenue. But I'd say that it has a level of importance to the hub, especially the growth that we've seen from kind of European traffic into Panama that connects via Panama beyond to other destinations in the region.
That has been very good for us. We've seen quite a bit of growth this year.
For example, Lufthansa started flying and I think that has been a very successful launch. And we have others such as KLM and Air France and Iberia also operating in Panama.
So, I think that's a main source of what we see as interline revenue sources for us, and it's, again, it expresses the power of the hub that a city as small as Panama has such significant intercontinental service.
Dan J. McKenzie - The Buckingham Research Group, Inc.
I see.
Jose Montero - Copa Holdings SA
And I think that about a half of that – by the way, Dan, about half of the traffic that these carriers bring into Panama flows beyond into the Copa network.
Dan J. McKenzie - The Buckingham Research Group, Inc.
I see. That's helpful, okay.
And then, Pedro, I wonder if you can update us on return of capital priorities from here. I'm just wondering if the stock buyback program really has been exhausted at this point and how should we think about buybacks going forward?
Pedro Heilbron - Copa Holdings SA
I'm going to let Jose answer that one.
Jose Montero - Copa Holdings SA
Okay. So then we – as you know, the board about a year-and-a-half ago announced a buyback program, of which, we've executed about half.
I think that during this year, especially during the second and third quarter, we've been mostly focused in ensuring that our cash balance remain strong, and the strength of the balance sheet remains as such. And that's been the main focus right now.
Of course, without the other main source of – capital return to shareholders is our 40% dividend policy. We actually have updated or adjusted this year.
And I think that that's a leading source of value for a shareholder of the company.
Dan J. McKenzie - The Buckingham Research Group, Inc.
Understood. And then one final housecleaning, revenue management technology still on track to be implemented second half of 2017 and is there a risk that that deployment could potentially be delayed?
Pedro Heilbron - Copa Holdings SA
Yeah. Well, not exactly revenue management.
It's Pedro. But it's our passenger reservation and services system or CSS technology.
So, yeah, that's on track for the second half of 2017. It should be implemented by the fourth quarter of next year.
Delays are always a risk, but since in this opportunity, what we're doing is upgrading our current systems. I think the risk of delay is much lower than if we were changing systems.
So we're pretty confident that it should be online by the end of next year.
Dan J. McKenzie - The Buckingham Research Group, Inc.
Okay. Thanks, guys.
Pedro Heilbron - Copa Holdings SA
Good.
Operator
And our next question comes from the line of Duane Pfennigwerth with Evercore ISI. Please go ahead.
Duane Pfennigwerth - Evercore Group LLC
Hi. Thanks.
I really appreciate the time. Just going back to Wingo for a second, is it a separate subsidiary or a separate brand?
What is your ownership percentage of it and how will the results be reported into your consolidated reports?
Pedro Heilbron - Copa Holdings SA
Right. So, yeah, so it has been – it can be kind of confusing.
It's a separate brand. Our Colombian subsidiary and our Colombian operating certificate is Aero República which we rebranded to Copa Airlines Colombia.
And in a way, we're rebranding again to Wingo, but it's our same operating certificate. It's the same operating team, group of pilots, mechanics, et cetera.
We have reconfigured the four airplanes we have mentioned. But it's an ongoing operation which Copa Holdings owns 100% and it will continue being under the Copa Holdings reporting.
Duane Pfennigwerth - Evercore Group LLC
Okay. So those are fully consolidated results and can you tell us what the margins look like or have looked like in Colombia relative to the system average?
Pedro Heilbron - Copa Holdings SA
So, of course again, it's all consolidated in Copa Holdings and what we're changing with Wingo, it's the domestic which is basically a few leisure routes because we have reduced domestic to almost nothing as we know. So, the few remaining domestic leisure routes and the off hub, so the international routes out of Bogota that do not touch our Panama hub.
So that has been reconverted to Wingo. The Colombia to hub operation remains under Copa Airline, a brand.
But the network that I've just alluded to has been returning losses, has been losing for the past number of years and Wingo looks to turn that around.
Duane Pfennigwerth - Evercore Group LLC
Yeah, you used to report that back in the day. You might consider doing that again, would help us understand the margin improvement potential a little bit better.
And then just lastly, I don't know if you'd be willing to do this, but could you breakout RASM growth by month in the third quarter. How did that trend in July, August and September?
And I guess October has closed, what does that look like in the month of October? And thanks, Pedro, for taking the questions.
Pedro Heilbron - Copa Holdings SA
I'll let Jose not answer that one.
Jose Montero - Copa Holdings SA
I'll say, Duane, no, I think like the quarter, in general, I think performed, in general, better than the quarter last year. So I would leave it at that.
I'd say that we didn't necessarily see a particular month spike up, I think it was a uniform sort of trend in the same way. So...
Duane Pfennigwerth - Evercore Group LLC
Thank you.
Jose Montero - Copa Holdings SA
Again, driven by the load factor more than anything.
Operator
And our next question comes from the line of Ravi Jain with HSBC. Please go ahead.
Ravi Jain - HSBC Securities USA, Inc.
Hi. Good morning.
I had a quick question on Costa Rica. I mean I would love to hear your thoughts on Volaris for in the (49:42) Costa Rica, and their plans to make it a slightly larger operation.
Just your thoughts on a longer-term basis of how it impacts your network or your competition in Central America for you? Thank you so much.
Pedro Heilbron - Copa Holdings SA
Okay. It's Pedro.
So, to be honest, I don't really know much about their plan. So there's not much I can comment.
I believe not specifically about what they're planning to do because I don't really know. We don't really know down here.
But what I can tell you that the intra-Central America market is very thin, it's very small, and it has plenty of capacity. We serve it with multiple daily frequencies and relatively low load factors.
So I don't think there's a lot of room there for new operators. The other important matter is that it's a region with very high departure taxes, very high ticket and departure taxes.
So a one hour flight is going to have over $100 just in taxes. And what that means is that it's very difficult to stimulate a market, very difficult to stimulate with low fares when you – when right off the bat, your fares are at least $100 or above before you get a penny for yourself.
So very hard to stimulate. Now, if their plan is to serve Central America to the U.S., to North America, that's a whole different ball game.
That's a much larger market and we don't really compete in that market. So we will not be affected.
Ravi Jain - HSBC Securities USA, Inc.
Thank you, Pedro. That's really helpful.
Pedro Heilbron - Copa Holdings SA
Thanks, Ravi.
Operator
And our next question comes from Renata Stuhlberger with Goldman Sachs. Please go ahead.
Renata Stuhlberger - Goldman Sachs do Brasil CTVM SA
Thank you. So two questions for me.
The first one is, could you please comment what is behind your very strong growth demand figures of 13% during the quarter? And my second question is in the Copa Day, you provided a roadmap for margins to recover to the 20% level with expensive hedges would allow a 4 percentage points gain, better local economies that we read as traffic and yield would allow another 2 percentage points gains to your long-term EBIT margin levels.
So, from the new tentative guidance of 70%, can you please give us a breakdown of where the improvement is coming from in terms of jet fuel costs, yields, traffic and that's it for me. Thank you.
Pedro Heilbron - Copa Holdings SA
So it's Pedro. I'll the second one and then I'll let Jose add more to it and then I'll address your first question.
But when we show you that path to higher margins, which I again mentioned at the beginning of the call, that's all other things being equal. So, when fuel price is a lot higher as we have guided to, then some of those improvements are going to compensate for a higher fuel.
And we're not going to be breaking them down. But in our guidance, there's the fuel hedges coming up and that's like 4 percentage points, more or less.
So that's coming up in 2017. So that's a big part of what – it's making the difference.
And then some of the other initiatives are compensating for higher fuel prices, assuming also including an assumption that the demand environment is going to continue strengthening as we've seen so far.
Jose Montero - Copa Holdings SA
And in terms of the traffic, I'd say there are couple of items. First, we have been very active in managing our network and managing our capacity that we deploy.
So it is not only the fact that we have reduced kind of our growth profile and been very forward in removing capacity that was not required, but also we shifted around capacity throughout the network and been very smart about shifting ASMs in different parts to ensure that we take the capacity in the best way possible. So – or the demand in the best way possible.
But having said that, there has also been some good performing markets in the last several months. I mean I think some of the South American markets that I mentioned earlier that had not yet been performing during the second quarter have kind of been – and the rebound.
You see the Brazilian market, the Colombian market on a traffic basis, certainly are seeing positive trends in the third quarter. So we are seeing a little bit of that, but it was also related to the actions, the proactive actions that we've made with the capacity in the network.
Renata Stuhlberger - Goldman Sachs do Brasil CTVM SA
That's clear. Thank you and congratulations on the results.
Jose Montero - Copa Holdings SA
Thank you.
Operator
And our next question is from the line of Leandro Fontanesi with Bradesco. Please go ahead.
Leandro Fontanesi - Bradesco S/A CTVM
Hi. Thank you.
So, just with regards to competition, I would like to know if you consider any change in the competitive landscape for next year in your 2017 guidance? Sort of like, it was mentioned before, we see some airlines wanted to expand to Central America and also one group wanted to explore Colombia, so just wanting to understand if you consider that change in your guidance?
Pedro Heilbron - Copa Holdings SA
Yeah, the only thing we consider in our guidance is what has been announced, officially announced. We do not consider anything that is maybe speculation or that we don't know for sure, so that's all.
And it's not really significant what has been announced in terms of changes from competitors or new competition for 2017.
Leandro Fontanesi - Bradesco S/A CTVM
Okay. And just a second question.
Would you consider reconfigurating more of your aircraft for Wingo if you do see a change in competitive landscape, meaning more low cost airlines or ultra low cost airlines coming to your market?
Pedro Heilbron - Copa Holdings SA
Yes, we would for sure if we see there's an opportunity. We won't do it just because there's another low cost airline in our market.
We will do it if we see an opportunity for Wingo to expand into new markets. It's not our focus right now.
But, yes, we have the aircraft, and we have the means. And with Wingo, we've learned a lot and we're learning a lot about the ULCC model.
So, yes, that is something we always consider it.
Leandro Fontanesi - Bradesco S/A CTVM
Okay. Thank you.
Operator
And our last question comes from the line of Hunter Keay with Wolfe Research. Please go ahead.
Hunter K. Keay - Wolfe Research LLC
Hi. Thanks for the follow-up.
Pedro, you classified the share of PSS as an upgrade. I know at the Analyst Day, you said that the Sabre PSS, the SabreSonic PSS was suspended.
Is that officially dead now? Or is that still in a suspended state?
Are you guys going to just push forward with the upgrade to the Sabre platform permanently? Thank you.
Pedro Heilbron - Copa Holdings SA
No, no, it's suspended. Nothing has changed from the Investor Day.
Its suspended, but what we're doing with HPE at the end of next year, which has already started, of course, will be functional by the end of – it's an upgrade to the system we have today. So it's not a change of system, no data migration or any of that.
And it's an upgrade that's going to give us everything we need, in terms of being able to sell ancillaries, and some of you, I think we've talked about. But the Sabre implementation has been postponed a few years into the future.
Hunter K. Keay - Wolfe Research LLC
Okay. So just to be clear, are you – five years down the road, are you going to be running two PSS platforms?
Or are you going to be completely come over (58:28) to Sabre at this point? Or is this just like an upgrade or like a bridge solution?
Pedro Heilbron - Copa Holdings SA
Yeah, you can look at this upgrade as a bridge solution. And with time, we'll see what happens, but it will be a bridge solution at worst.
I mean we will never have two different systems.
Hunter K. Keay - Wolfe Research LLC
Got it. Thanks a lot.
Jose Montero - Copa Holdings SA
Thank you.
Operator
Ladies and gentlemen, this concludes our Q&A session for today. I would like to turn the call back to Mr.
Pedro Heilbron for final remarks.
Pedro Heilbron - Copa Holdings SA
Okay. Thank you, all.
This concludes our third quarter earnings call. Thanks for your time and continued support and good luck with the new government.
Operator
Ladies and gentlemen, thank you for your participation. That concludes the presentation.
You may disconnect and have a wonderful day.