Feb 16, 2017
Executives
Raul Pascual - Director, IR Pedro Heilbron - CEO Jose Montero - CFO
Analysts
Josh Milberg - Morgan Stanley Matt Roberts - Raymond James Hunter Keay - Wolfe Research Duane Pfennigwerth - Evercore Group Rogério Araújo - UBS Ravi Jain - HSBC Securities Michael Linenberg - Deutsche Bank Securities Dan McKenzie - Buckingham Research Group Pedro Bruno - Santander Investment Renato Salomone - Itaú BBA
Operator
Ladies and gentlemen, thank you for standing by. Welcome to Copa Holdings Fourth Quarter and Full Year Earnings Call.
During the presentation, all participants will be on a listen-only mode. Afterwards, we will conduct a question-and-answer session.
[Operator Instructions] As a reminder, this call is being webcast and recorded on February 16, 2017. Now, I'd like to turn the conference call over to Raul Pascual, Director of Investor Relations.
Sir, you may begin.
Raul Pascual
Thank you very much, Brian, and welcome everyone to our fourth quarter earnings call. Joining us today are Pedro Heilbron, CEO of Copa Holdings; and Jose Montero, our CFO.
First, Pedro will start with our fourth quarter and full year highlights, followed by Jose, who will discuss our financial results. Immediately after, we will open up the call for questions from analysts.
Copa Holdings fourth 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 fourth 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
Thank you, Raul. Good morning to all and thank you for participating in our fourth quarter and full year 2016 earnings call.
As always, I first want to congratulate all of our co-workers for their efforts during this quarter and throughout the year. Their dedication and commitment keeps us at the forefront of Latin American aviation.
As you might recall, during our last call, we talked about seeing a clear improvement in the demand environment and stronger traffic patterns, although still at lower fares. We also mentioned that with more stable currencies, it was probably only a matter of time until we started seeing some strengthening in yields.
That said we're happy to report that during the fourth quarter we were able to deliver higher load factors and year-over-year and quarter-over-quarter yield improvement resulted in a significant unit revenue expansion. We're optimistic this trend will continue into 2017.
In fact, yesterday we released the January traffic figures which show a very strong 83.7% load factor, an increase of 3.8 percentage points year-over-year. Among our main highlights for the quarter traffic increased 11.3% year-over-year and our load factor came in at 81.6%, almost 7 percentage points higher than Q4 2015.
The yields increased 1.3% year-over-year or almost 5% when adjusting to an increase in length of haul. Our higher load factor and higher yields resulted in unit revenues of $0.107, an increase of almost 11% year-over-year.
Due mainly to non-cash accounting adjustment which was Jose will explain in detail our ex-fuel unit cost increase to $0.069 for the quarter. As a result our operating margin came in at 11.8% for the quarter, up close to 5 percentage points from the fourth quarter of 2015.
Also keep in mind our operating results include considerable realized fuel hedge losses. Excluding the impact of these hedges, most of which expired in the fourth quarter, our operating margin would have come in about 15% even after the non-cash accounting adjustments mentioned before.
On the operational front, top earnings [ph] delivered on-time performance of 86.4% and a completion factor of 99.7%. Now turning to our main highlights for the full year 2016, we reached an operating margin of 12.4% for the year which excluding the close to $94 million in realized fuel hedge losses would have resulted in an operating margin of close to 17%.
Unit revenues came in 2.7% lower year-over-year but higher than expected at $0.101. More importantly, we've seen consistent and consecutive year-over-year improvement in unit revenues during the second half of 2016.
CASM ex-fuel stayed flat year-over-year at $0.064 among the lowest for a full service earning. We strengthened our network by adding three new destinations; Chiclayo in Peru; Rosario in Argentina, and Holguin in Cuba closing the year with 73 destinations in 31 countries, by far the most extensive and convenient into Latin America network.
We took delivery of one new Boeing 737-800 and returned two Embraer 190 ending the year with 99 aircraft one less than at the end of 2015. And we launched several important projects that should contribute significantly to our results over the next couple of years including upgrading our reservation system which will eventually enable further ancillary opportunity, migrating to a new unified MRO solution which will allow us to more efficiently manage our maintenance programs for both the Boeing and Embraer fleet expanding our maintenance facilities in Panama to increase our capacity to do more work in-house at a lower cost and a company-wide project to realize $50 million in recurring savings, about half of which were already achieved in 2016.
We also launched Wingo, our low fare, low cost operation out of Columbia and are happy to report that Wingo has had a great market reception allowing us to tap into a new demand segment. On the operational front, our team delivered excellent numbers with on-time performance coming in at 88.4% and a flight completion factor of 99.8% placing us once again among the best and most reliable airlines in the industry.
In fact, just a few weeks ago we were recognized by OAG for the second consecutive year as the second-most on-time airline in the world; and by flight stats, for the fourth consecutive year as the most on-time airline in Latin America. We also won SkyTrax World Airline Award for best airline, best staff and best regional airline in our region.
And we were recognized by GE and CFM International for operational excellence leading the Americas for the past five years in reliability of our engine type on the Boeing fleet. In summary, we once again delivered strong financial results while being recognized for our world-class service and on-time performance.
None of these achievements would have been possible without the professionalism, commitment and excellence of our entire team. I take this opportunity to express my admiration and thank them once again.
Turning now to 2017; we're seeing a continuation of strengthening demand patterns into the first quarter and expect the air travel demand environment to continue improving during the year. As a result, we're planning for fewer seasonal cancellations which we expect will result in higher utilization of our fleet and a 6% year-over-year capacity growth.
In terms of fleet, we expect to receive two 737-800 during the first quarter and return one leased Embraer 190 in the second half of the year, ending the year with 100 aircraft. To recap, we expect to continue seeing a recovery and improving trends in the demand environment during 2017 as we have been able to maintain higher load factors and have started seeing an improvement in yields.
We will maintain a very proactive, comprehensive and disciplined approach to capacity. Our team continues to deliver a world-class operational performance while achieving industry leading unit cost.
We're focused on executing several cost and revenue initiatives that are aimed at increasing our margins. And lastly, we're 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 strongly 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 fourth quarter in more detail.
Jose Montero
Thank you, Pedro. Good morning everyone and thanks again for joining us.
First and foremost, as always, let me begin by joining Pedro and congratulating the entire team for all their efforts and achievements during 2016. Among our highlights for the year, we maintain flight unit cost while growing capacity only 1.5%.
We increased our load factor significantly, especially in the second half of the year resulting in our highest yearly low factor ever of 80.4%. And during the fourth quarter, our unit revenues increased close to 11% year-over-year.
Reported net income for full year 2016 came in a $339.8 million, this translates to earnings per share of $8.02 and an operating margin of 12.4% compared to 11.8% for 2015. These results included significant realized fuel hedge losses of close to $94 million for 2016 and $95.2 million for 2015.
Excluding these realized hedge losses, our operating margin would have been 16.7% in 2016 than 16.1% in 2015. Three special items; mainly the fuel hedge mark-to-market gain of $111.6 million, underlying net income came in at $206.7 million or adjusted earnings per share of $4.88 compared to $226 million in 2015 with adjusted earnings per share of $5.15.
Turning now to our fourth quarter results; we grew capacity by 2% year-over-year, our revenue passenger [ph] amounts increased 11.3% year-over-year which resulted in a consolidated low factor of 81.6%, a 6.8 percentage point increase versus Q4 2015. Furthermore, passenger yields came in 1.3% higher year-over-year which combined with a higher low factor resulted in a unit revenue increase of 10.7% from $0.097 in Q4 2015 to $0.107 in Q4 2016.
Consolidated revenues increased almost 13% to over $601 million. On the expense side our fourth quarter operating expenses increased 7.4% year-over-year and our cost per available seat mile increased 5.3% to $0.095 from $0.09 in Q4 2015.
The cost per available seat mile excluding fuel costs ex-fuel CASM increased 6.7% to $0.069. The higher ex-fuel CASM for the quarter is mainly driven by a non-cash accounting adjustment and depreciation.
So we adjusted to fleets useful life assumption from 30 to 27 years. It is important to mention that we recorded the entire 2016 adjustment in the fourth quarter putting additional pressure on the quarter's unit cost figure.
The adjustment was made to reflect our current assessment of the existing fleet given the new generation of aircraft entering the market in the coming years. Of the $12 million charge, $9 million corresponds to depreciation expense for the first three quarters of the year; it reduced our fourth quarter earnings by more than $0.21 per share.
There were also some increases in passenger revenue related costs, mostly corresponding to carrying heavy load factors. Consolidated operating earnings for the fourth quarter came in at $71.1 million resulting in an operating margin of 11.8% compared to 7.3% for the fourth quarter of 2015.
Excluding the effect of realized fuel hedges, our operating margins would have been 15.4% for Q4 2016 and 11.9% for Q4 2015. In terms of net results, net earnings for the quarter came in at $95.8 million or earnings per share of $2.26.
When excluding extraordinary items, mainly the realized the fuel hedged mark-to-market gain of $24.3 million, underlying net income for the quarter came in at $60 million or earnings per share of $1.42, compared to last year's fourth quarter underlying net income of $41.5 million or adjusted earnings per share of $0.96. We exclude the $9 million charge related to the first three quarters worth of incremental or depreciation.
Our earnings per share would have come in close to $1.63, an improvement of almost 70% with the fourth quarter of 2015. Looking at non-operating income and expense; fourth quarter generated a net non-operating income of $27.8 million mainly consisting of a $24.3 million fuel hedge mark-to-market gain.
We respect to fuel hedges, our position has remained unchanged since July of 2015. For 2017 we have about 5% of our projected volume covered with jet fuel swaps at an average of $1.80 per gallon.
Turning to the balance sheet; we ended the year with a very strong financial position with assets totaled $3.8 billion or an increase of over $130 million versus the end of 2015. Owner's equity totaled approximately $1.85 billion, debt towards capitalized leases totaled approximately $2 billion and our adjusted net debt to EBITDA ratio came in at a very strong 2.2 times; by far the lowest in our peer group.
In terms of debt, we closed the year with approximately $1.2 billion in bank debt, about 60% of which is fixed rate, the blended rate including fixed and floating rate debt of approximately 2.7%. In regards to cash, short and long-term investments closed the year with over $815 million which represents approximately 37% of last 12 months revenues.
Turning now to our fleet; during the first quarter of 2017, we expect to receive to own 737-800 and returned one Embraer 190 upon its lease expiration in the third quarter for a net increase of one aircraft in the year. Finally, I'm pleased to announce that our Board of Directors decided to maintain the same dividend payout as in 2016, slightly above the corresponding dividend amount according to our dividend policy of 40% of prior year's underlying net income.
As a result, on March 15 we will pay out our first quarterly dividend in the amount of $0.51 per share to shareholders of record as of February 28, 2017. So going back to our results and to summarize; demand for air travel in our region strengthened during the latter part of 2016 and is expected to continue improving during 2017.
We continue to practically manage capacity in an effort to improve unit revenues for our selectively capturing market opportunities. We continue looking for efficiencies in order to reduce our unit cost, we have implemented a series of revenue and cross initiatives that should contribute to our results during the coming years, we have one of the strongest balance sheets in the industry and we continue to return value to our shareholders.
Today we're also providing guidance for 2017 based on our operating plan and expectation for air travel for the year. Keep in mind that our visibility for the full year is still limited; we're increasing our capacity growth in terms of ASMs to plus or minus 6% based mostly on increased aircraft utilization; we're maintaining our operating margin range of 15% to 17%.
Our 2017 full year guidance is based on the following assumptions; both factor of plus or minus 80% rather than plus or minus $0.104, CASM ex-fuel of plus or minus $0.064 and an effective fuel price per gallon including into claim the net of hedges of approximately $1.80. Thank you.
And with that we'll open the call to some questions.
Operator
Thank you. [Operator Instructions] Our first question comes from the line of Josh Milberg from Morgan Stanley.
Your line is now open.
Josh Milberg
Thank you very much. Good afternoon everyone.
The first question I had relates to your 2017 guidance. One factor that you would highlight in the past is enabling last year's big improvement in the load factor with a lower ASM growth; and now you're expecting to be able to stay at the 80% level while drawing capacity at a faster pace.
So we're just hoping you could comment further on your thinking around that? I realize that the January number was quite strong.
Pedro Heilbron
Yes. So the key thing with our -- the load factor growth or the load factor we're guiding to is that mostly putting back low season cost we had in 2016 as with aircraft utilization is not a new route, it's not a new market, it's not even [indiscernible] but it's not mostly new frequencies in current markets so just let low season reductions given the strengthening of our market.
So it's lot more predictable and also it's kind of a new normal for us. The higher load factors as we saw during the fourth quarter and even the third quarter of last year.
Josh Milberg
Okay, that's very clear. I mean this is a somewhat related question and you answered it in part just now but my second question is, if you could just give a little bit of additional color on how you see the distribution of the added capacity this year from a country standpoint?
And I was wondering if you could eventually end up adding back some or a significant amount of capacity to Brazil just -- with a better economy in the country, and also -- that substantial strengthening of the currency that we've seen in recent weeks.
Pedro Heilbron
Right, so it's spread evenly I would say it. Well, maybe -- if not exactly evenly but it's -- since this adding back capacity but again its capacity -- it's mostly low season costs more than year round capacity.
So in July or December month we usually fly close to full capacity and we were very aggressive cutting back during last year in lower season month like let's say September or an October. So we're adding some of that back and it's in many markets, it's all over the place.
However, answering your specific Brazil question; we have been adding a little bit of capacity back in Brazil but not near what we had before, so we're staying very rational. We're not really growing in terms of aircraft so I think that's an important point, we will have this year the same fleet we had in 2015.
So it's not like we can go crazy with capacity but we put a little bit more capacity in Brazil rounding up a frequency and again, most of that will be low season costs that we were not planning to make this year.
Josh Milberg
Okay, that's great. Thank you very much.
Operator
Our next question comes from the line of Helane Becker from Cowen and Company. Your line is now open.
Unidentified Analyst
It's actually Cunningham [ph] in for Helane. Just a little bit more on the capacity side, I don't think the market is like -- what fall you guys are pushing capacity growth given the improved demand environment.
That said, the industry as a whole has once again begin to push capacity growth and with growth ramping throughout the year. What gives you confidence that you'll see year-on-year gains in unit revenue in the second half given your growth and the industry growth overall?
Pedro Heilbron
Well again, we are not growing capacity that much except for again adding frequencies or not cutting as many flights because we're seeing stronger demand patterns; so we don't see a reason to forecast the same number of flights that were reduced last year. So that's one things; so that's a lot more predictable for us.
Also in our core markets, we're not seeing the capacity at that that you might be seeing overall in other markets. So there have been a lot of add let's say from the U.S.
to the Caribbean, to Canada, also to the Caribbean including Cuba of course, some in for South America. But overall, in our market we're not seeing that much additional capacity and we're not contributing to that either because we're staying very rational, at least this year.
Unidentified Analyst
Okay, great. So just a follow-up on that; when you think about capacity growth, is it more about like a unit revenue metric that you look at are you looking more towards like the margin performance of the overall route?
Jose Montero
I think it's a network business so we ensure that there is an impact to the entire network. So -- but the one thing I would say Connor is that to add to what Pedro just mentioned is that, at least for the first quarter we are seeing positive unit revenue trends in the region on a year-over-year basis, so we're very encouraged by the performance we were seeing, especially given the fact that we're not seeing an incremental amount of capacity out there right now.
But so far from where we have visibility we're seeing positive trends in terms of unit revenues in the region.
Unidentified Analyst
Okay, great. And then just on your head position, I know you guys haven't added in quite some time but you have 5% of your jet fuel hedged this year.
I would imagine that that's front-end loaded in 2017. And then I would imagine you're unhedged in the back half of the year, is that fair to say?
Jose Montero
Well, actually -- Connor, this is basically spread out evenly throughout the year. So you can assume that the 5% is essentially flat for the year.
Pedro Heilbron
And I should add that the potential hedge losses from that 5% are not material or minimal.
Unidentified Analyst
Okay. And then, are you comfortable -- so is there any hedges put in place for 2018 and if not are you comfortable saying you're done hedging jet fuel at this point?
Jose Montero
No, we don't have any positions in 2018 and we haven't really taken any new hedging positions since July of 2015. So for the time being we're really not hedging as such.
Unidentified Analyst
Great, thanks guys.
Operator
Our next question comes from the line of Savi Syth from Raymond James. Your line is now open.
Matt Roberts
Good morning, gentlemen. This is Matt Roberts on for Savi actually.
Kind of a macro-based question here; could you just talk about demand in pricing trends in specific regions or countries throughout Latin America as well as peak versus off-peak?
Pedro Heilbron
Okay, so it's Pedro here. So what we're seeing right now, I mean overall I don't think there is a one market that's much different, it's the rest; I think this is -- it is the same for most markets, at least for our main markets.
We're seeing stronger demand in our markets, so we're expecting better unit revenues or improving unit revenues is what we saw last year. What we saw last year for the first half of the year the demand trends improved and the negative variance year-over-year were reduced.
So it got better as the year went by and towards the second half of the year, we actually saw improvement in our unit revenue. I mean positive -- improvement always in our unit revenues and positive yields compared to the previous quarter over the end of the year.
And we see that trend continuing in 2017. So we're seeing strengthening year-over-year yields and therefore pressing [ph] numbers with stronger load factors.
And that's pretty much the case in every one of our main markets.
Jose Montero
Yes, Matt, just to add to that; indeed there is, I'd say that there isn't really a particular region that is driving, I think the entire network seems to be responding well and so we're seeing increases in unit revenues throughout the network on a year-over-year for Q1.
Matt Roberts
Okay, great, that's good enough. Thank you.
And then just quickly, as we think about costs moving into 2017, what the cadence of that would look like and are there any factors to consider, for example, more lease return costs or anything else that we should consider? Thank you for taking the questions.
Jose Montero
Yes, so in general the cost, ex-fuel CASM for 2017 are flat versus 2016 guiding to a $0.064 CASM ex-fuel. And there isn't really anything in particular, in terms of lease returns I think that our 2017 number of aircraft that we're returning is lower than what we had seen in 2016; so that will come down somewhat but it is not going to be significant in the overall picture.
So I think in general terms, we expect to have flat ex-fuel CASM for the year.
Matt Roberts
Great, thank you very much.
Operator
Our next question comes from the line of Hunter Keay from Wolfe Research. Your line is now open.
Hunter Keay
Good morning everybody. So it looks like -- you know, talking about your website [ph], it looks like you have a few root systems, fuel surcharges on there; looks like maybe roughly speaking it's about 10% of the fare.
So can you remind us what percent of your network allows for a fuel surcharge mechanism? And then within that how much the discretion exists with how those surcharges are implemented?
Pedro Heilbron
So it's -- and that we have the exact percentages with us but I would say that most markets allow for fuel surcharges, there are just a few exceptions to that rule. And at the end of the day you know its one final price that we work with.
So there have been fuel surcharges in the past and they -- many have stocked and are there in the pricing, especially in times of higher fuels but we compete on the basis of overall prices and our prices -- our pricing people are looking at that, the final number. So I don't think that we're going to be adding or reducing fuel surcharges in the foreseeable future.
And we would still be competitive in terms of the final price.
Hunter Keay
Yes, that's very helpful. I get it, thank you.
And then in the 20th you guys said, in May -- last May you were expecting to reach an agreement with your pilots we said till I read it in late 2016. I don't think that happened, so I guess that's my first question; it didn't happen.
And then sort of -- if not, where are you in that and are you in a position to provide maybe potential impact to either CASM or margin? Thank you very much.
Pedro Heilbron
Yes. No, we did not reach an agreement towards the end of 2016, as expected; it's taking a little bit longer.
We're on the table as we speak. And we hope to be done probably by May or June of this year looking at kind of the timing and how long that takes.
The numbers we're guiding to include any potential new contract with the pilot and we don't expect that to have a material effect on the overall performance or unit cost numbers of the company.
Hunter Keay
Okay, thanks Pedro.
Operator
Our next question comes from the line of Duane Pfennigwerth from Evercore. Your line is now open.
Duane Pfennigwerth
Thanks. I wonder if you'd talk a little bit about Avianca, is that still potentially alive situation from Copa's perspective?
And how do you think a closer relationship or their closer relationship with United impacts you if at all?
Pedro Heilbron
Okay. I can only comment on what's public and I cannot comment on speculation or anything like that.
So we can comment on what's been public that they've reached some sort of an agreement with United over other alleged airlines that were supposed to be bidding for them. Again we cannot confirm or deny that.
So a few comments; number one is the outcome, as United over -- you know, the other large U.S. carrier, obviously United have much better outcome for us.
We have a very strong and long lasting partnership with United Airlines, so we would rather have Avianca in a closer alliance with United than with someone else. Plus that will guarantee that Avianca space with Star Alliance, something that we also see as positive.
In terms of how that could impact a potential Avianca United deal; and again, we haven't really read much about the details of our potential deals, so it's hard to comment on that but a closer United Avianca relationship should not have a negative impact on Copa. If at all, it will be positive.
We have our own very strong alliance with United; it was a renewed last year. We are ready co-share [ph] and have a relationship with Avianca through Star Alliance; so I think the end result should be positive to us although again, the caveat is that we have seen no details.
So we cannot comment on fact, only on what we've read in the papers.
Duane Pfennigwerth
Thanks for those thoughts, Pedro. And I apologize Jose for this question but we still see it in the P&L; how much of your Venezuela sales are you selling currently in the local currency?
And can you update us on where your cash in Venezuela stands?
Pedro Heilbron
I have no problems with that question because Jose has answered it.
Jose Montero
Duane, so there is -- really we're not selling in Venezuelan currency anymore, we've not been selling in Bolivars since 2015. And we have zero Bolivars right now in our balance sheet.
Duane Pfennigwerth
So why do we still see gains? I guess you had like $20 million or something gain, so why do we still see that?
Jose Montero
So yes, it's a translational effect because of the fact that we have a liability and that liability position in Venezuela is mostly driven by local airplane ticket taxes, so it's reselling dollars where we pay some taxes in the local currency, so that creates for some accounting adjustments at the end of these period. So it's specifically related to that.
Duane Pfennigwerth
What is the minimum requirement? So in other words, where would cash have to get to before you'd have to start disclosing it again?
Jose Montero
We actually don't have any cash balances there but we still have a set of mostly government-related expenses that we have in the local currency. So about $1.5 million a month, so therefore we're -- because of the fact that our cash balance there is depleted we are in it for the specific expenses and payments that we have to make local.
We have to buy the currency just before we make the payment; so -- but isn't really that we're carrying any sort of balance whatsoever.
Duane Pfennigwerth
Okay. I can follow-up with you offline.
I appreciate you taking those tricky questions; it's just -- we still see the gains, and I'm not sure I understand that yet but I do appreciate you guys taking the questions.
Jose Montero
Absolutely.
Operator
Our next question comes from the line of Rogério Araújo from UBS. Your line is now open.
Rogério Araújo
Good morning. Congratulations for the results.
I have two questions; first is on the low cost carriers in Latin America. I want to know how Wingo's operation is going and how -- if the growth expected for 2017 remains the same or if you are more optimistic after the launching of this low costs subsidiary.
Also talking about low cost; I would like your opinion on Volare [ph] in Central America. You are already competing in least one route with them, if they -- if you expect them to keep it growing in Central America and if this could affect Copa in this region?
And if it's possible if you could give us the breakdown of revenues; how much of revenues comes from the Central America to U.S. markets and if they could become or not a competitor in these market niche?
But that's my first question. Thank you.
Pedro Heilbron
Okay, it's Pedro here. So few quick answers; the -- our -- well Wingo first, so Wingo has had a very strong beginning.
However we started Wingo during the very high Columbian season, December and January, so we knew that. We knew it was starting during high season, so we did not expect less than a strong start.
The projections is that Wingo will lose money in 2017. We do not expect Wingo to make money this year and Wingo will remain with only four 737-700; so we're not expecting to grow that either.
However, the goal also is for Wingo to lose less money that what Copa Columbia was losing in that same network. So it should be net positive for Copa Holdings even though only slightly for this first year 2017.
In terms of Volare, our intra-Central America network, it's almost an insignificant 1% of our total business and our total revenues. So we're going to be competing in some intra-Central America route; there are point-to-point routes or node -- our node type or hub, and the impact will not be material to Copa; so obviously we will compete aggressively with lower fares.
And what is the future, I mean I cannot really comment on their business plans; I don't know enough of it. You mentioned the Central America to U.S.
market; we're not really big players in Central America to U.S. So that should not have a big impact on us if that's your focus.
And intra-Central America, we think there is limited growth in those markets given that that the airport taxes are very high, the distances are short and the markets are not huge. So that's kind of the situation.
But I mean we only know what we see, what has happened up to now; we don't really know more than that.
Rogério Araújo
Yes, that's very clear. Thanks for the answer.
My second question is on the depreciation; you adjusted it in the fourth Q; so my question is regarding an upcoming quarters. Can I think that the depreciation in the upcoming quarters is going to be lower than 4Q '16 but is slightly above the previous quarter.
Does it make sense? Thank you.
Pedro Heilbron
Yes, that's correct. I think that you can assume that on a quarter-to-quarter basis on Q1 2017, Q1 '17 versus Q1 '16 you have an increase of oils being equal at around $3 million on the depreciation expense.
So yes, the Q4 adjustment that we made to catch up that cover the entire year and that was equivalent to about $12 million for full year 2016.
Rogério Araújo
Okay, makes sense. Thank you very much.
Congratulations again.
Pedro Heilbron
Thank you.
Operator
Our next question comes from the line of Ravi Jain from HSBC. Your line is now open.
Ravi Jain
Hi, good morning. I had a couple of quick questions.
One is a follow-up of the load factors. The load factors now are considerably above your historical average.
Do you actually see some scope off pushing a little bit of pricing, maybe at the expense for a couple of percentage points; do you see that overtime? And my second question is, could you give us an update on launch of be ancillary revenue initiatives and how do you see that panning out this 2017 and 2018?
Thank you.
Pedro Heilbron
All right, it's Pedro here. So there could be a little bit of what you're saying, so there could be the case where were we pushed pricing a little bit at the expense of load factors.
So that could happen. However, I think we're in a new normal in terms of having load factors in the neighborhood of the 80% range versus before where we were before, between 75% and 76%.
So I think the 80% are a new normal, although yes, we could you know be at 80% and not at 82% and push prices a little bit harder. So yes, we will always try to maximize CASM and I think our higher load factors are a result of that focused on maximizing product and that's the opportunity we've dealt with.
Of course, also a factor of growing much less -- well with 2017 will be three years in a row, so that has also had a very positive effect on load factors. In terms of ancillary revenues; A) so we had talked about the second half of this year as we implemented a new functionality on our PSZ systems; and I think that's going to be probably a little bit more towards the beginning and of 2017 beginning of 2018.
So I think we'll be a little bit late or later in pushing some of those ancillary opportunities. You know, deploying the new PSS functionality, so it's going to take us a little bit longer.
Ravi Jain
Thank you. That's very helpful.
Operator
Our next question comes from the line of Renata Stuhlberger from Goldman Sachs. Your line is now open.
Unidentified Analyst
Good morning. [Indiscernible].
Some of my follow-up questions; the first one is exactly on yields. I just want to get some -- for the clarification on the guidance, if we allies your [indiscernible], they have improved 15% to 16% sequentially since they bottomed in second Q '16 but at $0.104 for us are basically indicate almost flattish sequential gain in terms of yield.
So just wanted to get further clarification if you already see additional use and you should consider the last years guidance as a conservative one. That will be one question.
The second one, a follow-up on the dollar denominated or local currency nominated ticket sale, you guys mentioned that Venezuela all sales are dollar denominated these days; is there not to -- if you guys could share with us like out of Copa's total revenues, what percentage would be denominated in local currencies and what percentage will be denominated directly in dollars? Thank you.
Jose Montero
Okay, I'm going to answer the second question first which is about half of our -- of our sales are denominated in dollars and the rest are in other currencies. So yes, and then --
Pedro Heilbron
But they are all tagged to the dollars. So we price in dollars.
We convert basically the same day at the currency exchange rate of the valid day and the transfer out the fund. So it could be in a different currency but they are really priced in dollars.
Jose Montero
And in terms of our RASM for the year, indeed there is -- I think that the bump seems to be front loaded because the recovering that occurred -- last year occurred in the second half of the year. So what we're guiding to essentially has an improvement in RASM.
I'd say mid-single digits for the first half of the year related to the year-over-year recovery that we're seeing. And the second half is still too early in the year but it does have marginal improvement also on a year-over-year basis for the second half and that's kind of the way that we're seeing it right now.
Unidentified Analyst
Thank you. So I mean mid-single digit, the year-over-year for the first half even if that means that your sequential improvement as you mentioned, the sequential improvement that has been very strong in the second half would basically come to a pause, right?
Jose Montero
Again, it's early in the year and we'll see how the year progresses. So when we'll see how things look in the third quarter specifically, so we can determine how things go.
So I think we'll see how the future looks as we start getting close to the second half.
Unidentified Analyst
Thank you.
Operator
Our next question comes from the line of Mike Linenberg from Deutsche Bank. Your line is now open.
Michael Linenberg
Good morning everybody. I just have a couple, some of these are follow-ups.
Jose on the accounting; what was the catalyst to go from 30 to 27 years and then going from 30 to 27, what was the -- what's the underlying residual value assumption; you know, like what were you depreciating it down when it was 30 years versus -- what are you depreciating it down with respect to 27 years?
Jose Montero
Mike, so you know, yearly -- as per accounting standards you perform an analysis of what your depreciation assumptions in the useful life of the aircraft and just given the arrival of 737 MAX next year; we saw that it was a good moment to do this given how the MAX fleet is coming in the next several years. And in terms of the residual value assumption, for now we'll maintain it unchanged at 15%.
Michael Linenberg
15%. Okay, so that's helpful.
Now this is a question for Pedro. Pedro, you sit on the board and maybe you can answer this but you now have two United executives on your Board of Directors and I'm just curious within your charter is -- is that permissible or do they have to have an equity ownership?
I mean could we see a change there? Just any thoughts on that -- you know, again, from being a Board member?
Pedro Heilbron
Right. Yes, there are no restrictions to that fact.
Only Andrew Levy [ph] with a board member; Andrew Levy [ph] was an independent board member, before he became United CFO. So you can say we discovered him first.
So he is no longer independent but he is still a board member and we have a close relationship with him. John [ph], the VP for Alliances, it's always on our board.
They are great contributors; we have a close relationship with them. So there are no legal restrictions and you know, it's something that -- we play by ear, they are great contributors and we remain with a strong relationships.
And you know, if there is ever a conflict of interest, we will deal with it at that time because we have full flexibility in that regard but right now we think we're okay.
Michael Linenberg
Okay. So the reason I asked you is, they represent a sizeable chunk of your board and obviously they are looking to work more closely with Avianca based on what's been reported in the press.
You also work with Avianca to the Star Alliance and so my sense is, is that sizeable chunk of the board who has a very solid skillset, both of them are very, very capable executives. When you have decisions at the board level as it relates to Alliances JV and mergers; I guess presumably they have to recuse themselves from those conversations.
You know, you're not able to take advantage of that skillset, is that right or not?
Pedro Heilbron
That is correct in the case of a potential conflict of interest. If there is no potential conflict of interest then they of course participate fully.
But yes, they -- then you're right.
Michael Linenberg
Okay. And then just the last one on Wingo and I know there have been several questions that have been asked about this.
As I recall, I believe because Copa Columbia does have to file financials and correct me, if I'm wrong but I did -- I believe maybe at the operating level last year first half of 2016 maybe it was somewhere on the order of about $30 million. I could be wrong on this, you can correct me if you can, but you had indicated that it was off to a strong start obviously because December/January seasonally are strong month; so that was anticipated.
I thought I heard you say that it was on an improvement or a trajectory of improvement; you used the word modest and I didn't -- maybe that was -- you were characterizing something else and I wasn't sure if that was related to it losing less than $30 million, a lot less than $30 million or maybe you were just talking about operationally an execution. Can you just talk about maybe the initial trends and what you're seeing as we move into to the first half of 2017; you know, could we see a number that's a lot less than that $30 million?
Pedro Heilbron
Right. So yes, so what I said -- it had to do with financial results and what I meant to say was that Wingo should result or what we're projecting is that it will result in a modest reduction in loses for the -- what was the Copa Columbia, up hub and domestic network which has now flown under the Wingo brand.
Michael Linenberg
But that's more of a function, is that more of a function of just start-up costs and rolling up the new brand and new systems and so that's maybe a bit of -- maybe that's having some negative impact and that goes away, that's only temporary. Is that how we should think about that?
Pedro Heilbron
Well, it's also spooling up something that starts from scratch because Wingo -- it's a fully different business model, direct distribution has to create its own brand, its own clientele, etcetera. So it's part of pulling up a brand new operation under a very different business model.
There four startup costs but I would say that's not really the big issue right now, just that it takes time.
Michael Linenberg
Okay, very good. Thanks, Pedro.
Thanks, Jose. Thanks everyone.
Operator
Our next question comes from the line of Dan McKenzie from Buckingham Research. Your line is now open.
Dan McKenzie
Good morning, guys, thanks for squeezing me in here. So a couple questions; I guess you know for those of us that track bookings as a clue to revenue trends, you know, what we need to keep in mind about the volume metric for March and I appreciate you can make them whatever you want but you know all else equal, January and February appear very strong.
And so I'm just wondering what we should expect for March and I'm just really getting out the Easter shifts, I'm thinking maybe down 4% to 5%. And then I guess just -- but -- you know, maybe you can help me there.
But then related to this, how much of a revenue shift out of the first quarter into the second quarter does that Easter shift really account for?
Jose Montero
Dan, this is Jose here. I'd say, we've been saying that for the quarter we are seeing a year-over-year load factor improvement.
You know, kind of say low to mid-single digits. So there is I think the same trend that we just saw in January with our report yesterday for the rest of the first quarter.
And that's including of course the fact that there is a shift in Easter but we're still seeing that first quarter traffic is coming in above what we saw last year.
Dan McKenzie
Okay. And then the Easter shift is -- should we think about that as maybe a 50 bips of RASM to get shifted in the second quarter or 100 or 150; I've found that that can vary pretty greatly by airline.
Jose Montero
Yes, there is going to be an improvement. I think I mentioned earlier that there is going to be an improvement that we saw in terms of RASM for the first half in total what I'm seeing here basically is that there is -- yes, there is -- you could argue an improvement in RASM Q2 on a year-over-year basis that is in that range.
Dan McKenzie
Okay. And then Jose what's the balance sheet philosophy this year and how should we think about a year-end debt target?
And just given the low leverage; is there a plan to raise some leverage even though you don't need it? And if so, might that be cash that could be returned or ear marked as available to return to shareholders?
Jose Montero
This year we -- first of all, we do want to maintain having a strong balance sheet. I think that in moments like what occurred last year that is a very, very good thing to have in our arsenal.
This year we do have a set of commitments related to the aircraft that are coming in 2018 that are somewhat larger than what we had in 2016, more anything pre-delivery deposit associated with aircraft deliveries for 2018. So there are some more cash needs for this year.
But certainly we do see that the fact that we do have a strong cash position as that created a good position to have for us. That's I think the reason why our board decided to maintain the dividend payout in the same level that what we had last year I mean doing theory it should have -- according to our policy paid slightly less in dividend.
So that's kind of the way we're seeing it.
Dan McKenzie
Yes, I caught that. So can you just remind us what CapEx is for this year for Jose including the pre-delivery deposits or if you want to break those up separately?
Jose Montero
Yes. So the total CapEx for the year is going to be around -- I want to say about $270 million of which cash is around $180 million.
Dan McKenzie
Perfect.
Jose Montero
And that's including the $268 million or the $270 million includes the pre-delivery deposits with Boeing that we the aircraft to be delivered next year.
Dan McKenzie
Perfect. Thanks so much guys.
Operator
Our next question comes from the line of Pedro Bruno from Santander. Your line is now open.
Pedro Bruno
Hi, thanks for taking my question. It's actually a follow-up on the depreciation question before.
So first of all, just to make sure I understood correctly, we should expect a higher depreciation going forward, right? There just meant that was done -- was only done -- it was all done on the fourth quarter but it was for the period of 2016.
I think you already explained that, I just wanted to make sure I understood correctly but my question is even if you adjust to the $12 million depreciation impact on the fourth quarter -- do you see fourth quarter 20% higher than the quarter before 3Q. What would explain that please?
Thank you.
Jose Montero
There is some other minor adjustments in the fourth quarter related to one-time events related to maintenance more anything over that maintenance that came in during the second half of the year that we started depreciating during the fourth quarter. So that explains kind of the rest of the difference and those were one-offs that occurred in the fourth quarter.
And indeed just to reiterate during the 2017 period, you will see an increase in the depreciation line of around $3 million per quarter oils being equal. And again this just to reiterate the incremental depreciation expense is included in our $0.064 ex-fuel CASM guide for 2017.
Pedro Bruno
It's clear now. So $3 million in excess depreciation for the following years and that's on the basis of approximately $35 million depreciation we've been seeing into the third quarter.
So all the difference is basically one-off, all the difference from the $12 million that you explained is basically one-off then, correct?
Jose Montero
Yes.
Pedro Bruno
Okay, thank you very much.
Operator
Our final question comes from the line of Renato Salomone from Itaú BBA. Your line is now open.
Renato Salomone
Hi, thanks for taking my question. My first question is thinking about the network effect of the recovery in South American demand, can you comment on demand to destinations like Las Vegas and Boston that are bit sensitive to Brazil?
Pedro Heilbron
So there is some improvement in those destinations. In the case of Las Vegas, we reduce capacity quite a bit last year and we're remaining that way, we're keeping capacity low so that also helps.
But we have seen an improvement in Brazilian demand throughout our network, partially related to the strengthening of the currency in Brazil of course. And then our capacity in Brazil is less than what it was in 2015 and even in 2016.
So those two factors have contributed but again, in general, Brazil is getting stronger, probably faster than what we expected.
Renato Salomone
Perfect. And then a final question, Pedro you added a lot of talent and seniority to Copa's commercial team over the past 18 months.
What are the main differences you observe in this part of the business; in this recovery compared to previous recoveries?
Pedro Heilbron
Well again, interesting questions. Suddenly we were faced with that; I mean -- I don't want to say that it's all over but 2015 and 2016 were challenging years in our part of the world and we did strengthen our commercial team quite a bit.
We brought a number of very talented experienced executive and I would say that we have or what they had -- they have brought in is an experience in handling difficult situations but a lot of also technical knowledge, precise commercial aviation technical knowledge that has been very, very valuable to us and I think you've seen the results in how we are performing commercially.
Renato Salomone
Excellent. Thank you very much.
Operator
That concludes our Q&A session. I would now like to turn the call back to Pedro Heilbron for any further remarks.
Pedro Heilbron
Okay, thank you all. This concludes our fourth quarter earnings call.
As always, thank you for being with us and thank you for your continued support. Have a great day.
And we'll see you in the next call. Thank you very much.
Operator
Ladies and gentlemen, thank you for your participation. That concludes the presentation.
You may disconnect and have a wonderful day.