Copa Holdings, S.A.

Ladies and gentlemen, thank you for standing by. Welcome to Copa Holden's third quarter earnings call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, you will have to press star then 1 on your telephone keypad. As a reminder, this call is being webcast and recorded on November 19, 2020. Now I will turn the conference over to Raul Pascual, Director of Investor Relations. Sir, you may begin.

Thank you, Sarah, and welcome everyone to our third quarter earnings call. Joining us today are Pedro Hebron, CEO of Copa Holdings, and Jose Montero, our CFO. First, Pedro will start by going over the actions the company has taken to mitigate the impact of the COVID-19 crisis and the restart of our operations. followed by Jose, who will discuss our financial results. Immediately after, we will open up the call for questions from analysts. COPPA Holdings financial reports have been prepared in accordance with international financial reporting standards. In today's call, we will discuss non-IFRS financial measures. A reconciliation of the non-IFRS to IFRS financial measures can be found in our earnings release, which has been posted on the company's website, coppa.com. Our discussion today will also contain forward-looking statements, not limited to historical facts, that reflect the company's current beliefs, expectations, and or intentions regarding future events and results. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially and are based on assumptions subject to change. Many of these are discussed in our annual report filed with the SEC. Now, I'd like to turn the call over to our CEO, Mr. Pedro Herrera.

Thank you, Raúl. Good morning to all, and thanks for participating in our third quarter earnings call. I hope that all of you and your families are doing well and staying safe. Before we begin, I'd like to thank all our coworkers for their commitment to the company and recognize their continuous efforts and many sacrifices during these difficult times. To them, as always, my utmost respect and admiration. As expected, given government restrictions in the region related to the COVID-19 pandemic, we were not able to provide service for the first 45 days of the quarter. On August 14, after five months of virtually no operations, COPA was allowed by the government of Panama to start operations with restrictions on the number of flights and the entry into Panama of non-citizens and non-residents. It began with a twice-a-week operation, serving eight destinations. Since then, the company has been gradually spooling up its network, restarting destinations and adding frequencies as quickly as the easing of restrictions and air travel demand has permitted. We ended the quarter with service to 15 destinations. Although September only amounted to 3% of pre-crisis capacity, the gradual restart of flight allowed us to become even more proficient in the new, more complex operating procedures and enhanced biosafety protocols. and to demonstrate our readiness to operate safely and reliably. On October 11, the Panamanian government's restrictions on non-citizens, non-residents, and number of flights were lifted, which, as expected, had a positive effect on our ability to continue building up the network, ending the month with service to 30 destinations representing close to 15% of ASMs compared to October 2019. We project to end the year having restarted service to more than 50 destinations and plan to operate in December approximately 40% of 2019's capacity. In August and September, while the restrictions on inbound Panama traffic were still in place, Load factors were approximately 60%. In October, after the above-mentioned restrictions were lifted, we saw healthier loads, approaching 70% for the entire month. Based on the flown traffic over the past three months and the bookings we're receiving for the near future, we believe demand will be able to sustain our current capacity plan for the remainder of 2020. In terms of financial results, with only 1.5% of our pre-crisis capacity, this was a very challenging third quarter. We recorded a net loss, excluding special items, of $121.6 million, making this our second quarterly loss on an underlying basis in 20 years, with the other being the second quarter of this year. By exercising great cost discipline and a better than expected sales and refunds performance in the quarter, we were able to keep our cash consumption well below our original expectations to about $36 million per month. Despite the encouraging progress in the vaccine development efforts, we continue preparing for what we believe will be a challenging 2021. as our region could still be subject to new infection waves with the possibility of further travel restrictions and a weakened demand environment, especially while we wait for the vaccines to become widely available. That being the case, we have taken many steps to strengthen the company and maintain one of the strongest financial positions in the industry. As of today, We have adjusted the size of the company to better match our future capacity and continue working on cost reduction efforts as we believe keeping a competitive cost structure and a strong financial position will keep us among the best prepared airlines to come out ahead once this crisis is over. We have delivered the first four Embraer aircraft to the new owner and expect to have delivered the entire fleet by June 2021. We signed a letter of intent to sell the first two Boeing 737-700s and continue actively marketing the remaining 12 aircraft. We have a plan in place to comply with all new requirements and return our six Boeing 737 MAX 9 aircraft to service. allowing us to offer a more competitive product in our longer segments. We're also in advanced discussions with Boeing and expect to reach a settlement agreement soon. Regarding our expiring leases, we have agreed to extend some of our leases on a power-by-the-hour basis, which adds even more flexibility to our fleet plan in case the market recovers faster than expected. And in terms of liquidity, we obtained new credit facilities for an aggregate amount of $165 million, bringing our total committed unrun credit facilities to $305 million, and total available liquidity to $1.3 billion at the end of the quarter. Lastly, I'd like to reiterate that we have a proven and very strong business model, which is based on operating the best and most convenient network for intra-Latin America travel from our hub of the Americas, leveraging Panama's advantageous geographic position with the region's lowest unit cost for a full service carrier, best in time performance, and strongest balance sheet. Going forward, the company expects that its hub of the Americas will be an even more valuable source of strategic advantage, It's likely that fewer intra-Lapin America markets will be able to sustain direct point-to-point service, so we believe the help of the Americas will be the best position to serve this market. Now, I'll turn it over to Jose, who will go over our financial results in more detail.

Thank you, Pedro. Good morning, everyone. I hope that you and your families are safe and doing well. Thanks for being with us today. I'd like to join Pedro in acknowledging our great COPA team for all their efforts and great team spirit during these very challenging times. As Pedro mentioned, we restarted scheduled commercial service in mid-August and have slowly been spooling up capacity ever since. For the third quarter, the contribution from these operations was still very modest as we only operated about 1.5% of the capacity compared to the same period last year. Nonetheless, we finally started fooling again. We've put a lot of effort into rebuilding our hub and look forward to having more substantial operations in the fourth quarter. Looking at third quarter results, we reported a net loss of $118.1 million or a loss of $2.78 per share. Excluding special items, mainly the unrealized $3.6 million mark-to-market gain related to the convertible nodes, we would have reported a net loss of $121.6 million or a loss of $2.86 per share. Our cash consumption for the second quarter came in at $36 million per month. This excludes $22 million in proceeds mainly related to tax credit reimbursements as well as the sale of one Embraer 190 aircraft. It also excludes a $50 million payment we made on a short-term credit line. This cash consumption is significantly lower than our prior estimates as we delivered more savings than planned and generated higher proceeds from sales and lower cash refunds than we originally expected. In terms of capacity for the remainder of the year, we expect to continue spooling up our operations. October came in at approximately 15% of October 2019 capacity, and we expect November and December to approach 30% and 40% respectively year over year. Assuming this gradual screw-up of our operations, we should be able to keep our cash consumption to about $25 million per month for the fourth quarter of the year. This figure assumes that our leased aircraft and debt commitments are paid in full, that we stay current in all of our obligations while not including the proceeds from aircraft sales. The improvement in our cash consumption estimate for the remainder of the year is a function of our sharp focus on the reduction of our cost base as well as improving sales figures. which are on pace with the projected spool of operations. I'm going to spend some time now discussing our balance sheet and liquidity. As of the end of the third quarter, assets totaled $3.9 billion, owner's equity was almost $1.5 billion, our debt plus our lease liabilities totaled $1.5 billion, and our lease liability adjusted net debt to a bid-buy ratio came in at 2.2 times. We closed the quarter with approximately $1.2 billion in debt. As I mentioned before, during the quarter, we repaid $15 million of our short-term credit facilities, and currently, all of our committed credit facilities remain undrawn. As to cash, short, and long-term investments, we closed the quarter with $1 billion. During the quarter, we took many steps to further strengthen our liquidity position. As previously reported, in the month of July, we closed a secured revolving credit facility for an initial aggregate amount of $105 million. And in the month of August, we established a new unsecured committed facility for $50 million, which remains undrawn. Including these and other previously established facilities, the company ended the quarter with an aggregate amount of $305 million in unutilized committed credit facilities, which added to our cash equates to more than $1.3 billion in total available liquidity. During the quarter, we finalized the sale and delivery of the first of 14 Embraer 190 aircraft. As of today, we have delivered three additional Embraer aircraft and expect to have delivered the entire fleet by June 2021. This month, we also signed an LOI for the sale of two Boeing 737-700s, which we expect to deliver during the month of January of 2021. Aside from the E-190 and 737-700 fleets, which are classified in our balance sheet as assets held for sale, we ended the quarter with 74 aircraft. 68 737-800s and six MAX-9s. During the month of December, we expect to receive two MAX-9 aircraft to end the year with a fleet of 76 aircraft. Including these figures are 16 737-800s, which will remain in temporary storage. Let me close by stating that once this most challenging situation passes, we believe Copa Salve Americas will remain at the best connecting point for travel in the region with a privileged location and even more efficient business model with lower costs and the best team in the industry. Thank you. And with that, we'll open the call to some questions.

Thank you. As a reminder to ask a question, you will need to press star then one on your telephone. To withdraw your question, please press the pound key. Our first question comes from the line of Dwayne Finningworth. with Evercore ISI. Your line is now open.

Hi, guys. How are you? Hi, Glenn. Can you talk, you know, what percentage of your markets are open now? Not necessarily the markets that you're flying, because that could be a subset of that, but what percentage of your markets are you technically able to fly to? And then, you know, generally speaking... What are the entry requirements? You know, for example, you have to present with a negative test or whatever. What are the entry requirements, and can you highlight any recent changes? So just to give us a sense for, you know, the number of markets that are reopening and what sort of entry requirements are in place.

Okay. Dwayne, first page, please. So one of the challenges we're all facing, and when I say we're all, I'm meaning like aviation worldwide, is that countries are all over the place in terms of their entry requirements. So in terms of open markets, I would say most of them are open markets. in one way or another, mostly are 100% open. There's others that are restricting the number of flights that are allowed in or restricting slots. For example, Colombia is restricting the number of flights per hour, so there are only so many slots available. And other countries are still restricting the entry of nationals and residents versus foreigners or visitors. Some countries are requesting a PCR negative test within 72 hours. Others have recently lifted that restriction, like Costa Rica and Colombia. So, you know, it's all over the place again, but I would say, in summary, most countries are open.

And then I totally appreciate its early days here, but is there any – you know, relative trends you could highlight, you know, markets where maybe you've been surprised at the level of demand recovery in a positive way versus, you know, versus markets that remain very restrictive. And thanks for taking the questions.

Yeah, it's hard to tell. Once a new market opens, well, it's not a new market, but once a market reopens, there's always pent-up demand that needs to be satisfied. It's usually VFRs. traffic to people needing to get back or visit families or personal reasons in general. So I would say no big surprises there. We're starting to see leisure traffic picking up a little, like from South America to the Caribbean. Obviously, it's a fraction of what it used to be, but it's starting to pick up a little. And although business traffic is the weakest right now, We're also starting to see companies that need to get their executives back in the air, visiting their markets, and so there's a little bit of that starting, but it's mostly VFR still.

Thank you. Thank you, Dwayne.

Thank you. Our next question comes from the line of Alejandro Garza. Zalma Kona with Credit Suisse. Your line is now open.

Hello, Pedro, Jose, Raul. Thank you for the call. Thank you for taking my questions. On the cash burn management, during the second quarter, you reported a monthly cash burn of $77 million U.S. dollars. For this third quarter, we saw a monthly cash burn of $36 million, so it's a significant improvement. So I'm curious on what's behind these significant decrease or what additional initiatives are you deploying to deliver this improvement? Thank you.

Yeah, Leandro, this is Jose. There's, I would say, three components to the improvement that we saw in our consumption of cash for the third quarter. The first one is, of course, cost. We've been very focused since the onset of the crisis in reducing our costs to the greatest extent, in negotiating all the contracts that we had. we have also, you know, frankly reduced the size of the company to match the size of the new reality that we expected. And this was done through offering packages for a subset of our employees and offering also voluntary unpaid leaves for employees as well. But in essence, we looked at every single cost base, and I think that we've been able to accelerate some of the improvements that we initially expected or that we've been seeing in the second quarter into the third quarter and beyond. The second one is we've seen, I think, a reduced number of cash refunds than what we expected. And that, I think, is a function of the policies that we've set in place to make more flexible the travel dates for customers. And that has resulted, I think, in a significant reduction in our ATL refund reduction. And then finally, we are seeing better than expected sales coming in during the quarter. And I'd say those are the three main sort of letters for for our improvement and also our improvement going into a fourth quarter as well.

Okay. Thank you. Very clear. And if I may, a second question. Just can you give a quick update on the densification plan announced in the last Investor Day?

Yeah. Pedro here. You know, with the pandemic, our investment were pretty much frozen, unless of an essential nature. So those are projects that we have to take up again. And we're starting to talk about those projects. But that was put in freeze. And we haven't really done much. We went into lowering capex and saving cash. And of course, load factors are down. and demand is weaker, so we don't have the same necessity to rush into higher-density planes. But I think that will happen eventually, and we'll pick it up again. But that was delayed.

Okay. Thank you very much.

Thank you, Andrew.

Thank you. Our next question comes from the line of Savvy Sight with Raymond James. Your line is now open.

Hey, good morning, everyone. This is actually Matt on for savvy. Appreciate the color you provided with expectations of 4q demand spilling up with capacity. But um, could you maybe provide a longer term look? I know we've got a lot of vaccine news out recently as well. But what are some of the potential capacity recovery paths that you're considering for 2021?

Yeah, so, you know, it's one of the most difficult things right now is talking long term because the booking curve has shortened and we are navigating uncharted waters. It's all new. But there are, of course, very encouraging news with the vaccines are coming out. So it seems like there's a bright light at the end of the tunnel. And there will be a point, hopefully soon, when it's going to be a lot easier to predict future demand. However, for December, for the end of this year and the month of December, we are talking now about 40% of ASN versus 2019, while in the previous call, we were talking of a range between 30% and 40%. So we're in the upper side of that range, and that's That's a good sign. And as I mentioned, our bookings support that ASM level. So our bookings make us believe that we can sustain those ASMs with a decent load factor. And we think that from then on, well, we hope from then on to build our ASMs gradually as demand allows us. But, you know, January will be a little bit, Better than December in terms of ASN. Not a lot, but a little bit better. Beyond January, bookings are not strong enough to know, and there's so much uncertainty out there with the virus and everything else that it's just very difficult for us to say anything, you know, beyond January.

I would say that you could argue that it's going to be – you know, in that range of time that Pedro just mentioned, somewhere in the low 40s of pre-COVID capacity. I say that the other component of that is simply for us to maintain our flexibility. And I think that we've been working quite a bit in terms of flexibility that we have in 2021. But it is still premature, as you could probably imagine, to say anything related to the full year of 2021.

Oh, yeah, certainly. Anybody's guess, but appreciate the color nonetheless. And for my second question, looking at your fleet plan, it seems like with the two additional MAXs coming in December and five remaining but not yet delivered, it seems like you can get back to just about 95% of 2019 capacity in 2021 if you wanted to. So could you provide a little bit more detail around your expectations around the 800s? I know you said you had some of them on the power by hour agreements. Could you maybe talk about re-delivery expectations or just some more color on the duration of those power by hour agreements or how many that pertains to?

Yeah, there's been some negotiations that we've been making over the last couple of months with some of our lease airplanes. They give us a lot of flexibility because that flexibility kicks right away. So we extended some of the expiring leases that we had in the 2021 range. And actually over the next two years we have about 11 leased airplanes that are going out and so we can gain some flexibility with these power by the hour agreements that we're doing. Having said that, in terms of number of aircraft that you could expect for next year at the end of the year, it will be in the mid-80s in terms of total number of aircraft. And so, as I mentioned in, I think, my preferred remarks, there's a portion of them that are going to be in storage. So I think there's going to be a range of possibilities in terms of the available number of aircraft that we have in the network for next year, depending on how the man ultimately behaves.

And just to add to that, we... We have a sizable order for MAX aircraft, and I'm sure we can work with Boeing if there's a need to change the delivery date. I mean, there will always be production issues, but we think we have enough flexibility with the leased aircraft, the expiring leases that can be renewed, the power by the hour, the stored aircraft, and our March, our... our max order where we can adjust a capacity as needed. And it could be upwards or downwards depending on how the market behaves. So I think that's one thing we've been able to manage very well.

Certainly. Well, thank you all very much.

Thanks, Matt.

Thank you. Our next question comes from the line of Helene Becker with Cowan. Your line is now open.

Thanks very much, operator. Hi, everybody, and thank you very much for the time. I'm not sure you can talk about this, but is there a specific sticking point with respect to the negotiations with Boeing, or is it just taking a long time because it's hard to get back and forth?

Yeah, there's no sticking point. Yeah, I mean, it's just the way it's happened. Maybe neither side has been in a big rush. It's not like we needed money to survive, and we want to agree to the right deal, knowing when the airplanes were going to be back in service, so that facilitates things. So, no, it's just the way it's worked. It's... Yeah, I don't think I have much to add to that.

Okay, well, that's a fair response, actually. And then I was just wondering if you could talk about what you need to do to return the MAX to service now that the USFAA approved it. Can you just maybe update us on what has to happen now?

Yeah, we have six MAXs. in Panama, grounded in Panama. And then there are seven that were built but not delivered. Those are somewhere in Seattle. We expect to be flying at least two of our six MAXs by the end of this year. That's our expectation right now. And there's a series of, let's say, technical matters like upgrading the new software. uploading the new software that you know it only takes a few hours we have to retrain pilots because they haven't flown the airplane for a while however i should say that the new training requirements are basically the same that we were doing before the aircraft was grounded copa was always had always done more than what was the minimum required we had the max simulator we're doing the simulator sessions So the new requirements are basically the same we were doing before. That's not a problem, but we have to put the pilots through that training program again. Then, you know, maintenance-wise, it's going to take us like about two weeks per aircraft to bring them up to the right maintenance level, which includes doing a few flights without passengers. a few test flights without passengers to make sure all the bugs are out. You know, when an airplane has been grounded for nearly two years and that's not what they're built for, there's a lot of maintenance work, even though we've been preserving them following Boeing's recommendations.

One thing I'll add there, Elaine, as well, is that Panama's Aviation Authority, of course, what the FAA has issued. So from the regulatory standpoint, that's something that facilitates also the process once this has been lifted by the FAA as well.

Okay. Thanks, Jose. I really appreciate that. Thanks, Pedro, for your detailed response. Have a nice day, guys.

Thank you, Elaine. Thank you.

Thank you. Our next question comes from the line of Hunter Key with Wolf Research. Your line is now open.

Hey, good morning, everybody. Morning. Thanks for getting me on. So on costs, you know, you've shown an impressive amount of variability as you've been cutting capacity. How do you think about those coming back as you slowly add capacity back? I mean, I'm trying to think about the balance here between what's been sort of deferred and what's truly variable in nature, and then thinking about maybe incremental efficiencies that you could drive from some operating leverage. It's really ultimately just a question about when we can start talking about that sub-six cent CASM number again. So any call around that would be appreciated.

Okay, Andrea, so this is Pedro. We all start to give Jose a little bit of time. But first thing I should say is that we haven't deferred any costs. And that's very important. The costs we're showing are our complete cost for the month or for the quarter. Nothing is going to come back to bite us later on. No leases, no nothing. We're paying for everything. We have renegotiated a bunch of fixed costs, plural number of contracts. We have brought down our fixed costs, as Jose mentioned before. And then, of course, there are the variable costs that are down because of volumes. So we expect that as ASMs come back, our unit costs, of course, are going to improve. And our plan and the way we have approached this crisis is that when everything is over, we're not sure what's going to be our site and how long it's going to take us to get back to 2019 level, but we want to make sure that we can be as successful as before, even before we get back to 100%, which means that we need a lower fixed cost base to be able to accomplish that. And I think we're there already.

Yeah, look, Hunter, the way that I'm seeing it is that when we are back to 80% of pre-code capacity, I think it will be back at the chasm that we had back in last year. So I think that we have found significant levels of deficiencies in this exercise that we've been making over the last several months. And so we're, I think, in a good place right now in terms of cost. Of course, that's not going to come in while the ASMs are still at a relatively low level, but once the ASMs are, again, back to around that level, some 80% of pre-COVID levels will be achieving our sort of around six CAS and X field that we were embarked on before. Wow, thank you.

And then you mentioned a little bit of green shoots on corporate travel. Obviously, it's very early, but I also think you mentioned previously that about a third of your volume was corporate travel um before is that true is it a third of your volume um and then the second sort of component of that question is when will you know how your corporates are thinking about their 2021 spend is that a january conversation are you having those conversations now because i would imagine there should be some degree of visibility on how your corporate your structured corporate stuff should spool throughout the year so i'll start with the second part so we have started those conversations but

Our corporate accounts don't really know what their travel plans will be for next year. But in most cases, people want to get back in the air. It might not be to the same degree as before, but pretty much everyone wants to get back in the air and get back to doing their regular business. And I think that also applies to people who have been locked at home for so many months that want to – go out and travel for leisure or for visiting friends and family. But in terms of our traffic, the way we've grown in the recent past, we've ended up in, I would say, a third VFR, a third leisure, and a third business. Not just corporate, but business. Corporate is much smaller, but business in general. In Latin America, not everything business means that it's corporate. There's a lot of smaller companies that don't have corporate accounts, but it's a third each.

Thank you.

Thank you. Our next question comes from the line of Rogerio Araujo with UBS. Your line is now open.

Yeah, hey, guys. Thanks a lot for the opportunity. A couple of questions here. The first one, is it too early to map out opportunities left by competitors? that are shrinking capacity in some of Copa's markets, and can domestic market in Colombia become more relevant in the future? So we saw already like a decade ago the Colombian domestic market was pretty relevant to the company, and this has reduced over time until you brought Ringo. So could this be an opportunity and any other potential opportunities left by the market? That's the first question. Thank you.

Right, so it's too early to tell. Every airline is pulling up at a different pace for different reasons, including restrictions in their home markets, et cetera. So it's very, very hard to tell right now which opportunities are going to be left open in the future. But we do believe that a number of markets will – will not be large enough to sustain direct point-to-point service as it was the case before. I mean, pretty much every market will be reduced for the next few years. So there's a number of markets that are going to fall below that minimum level for direct point-to-point. So there will be some opportunities for the hub to have even more value, but it's early to know. In terms of Colombia domestic and wingo, I think Wingo will remain opportunistic. That's a very competitive market, so we don't see Wingo just going wild and trying to grow with aggressiveness. I think we will remain opportunistic and careful in how much we grow and where we grow. But Wingo did get a fifth airplane. Recently, we have extra planes that we don't need right now, so they got a fifth plane, and they will get a sixth plane by the end of the year, so in a few months, so actually in a month. So they have extra capacity, but they will deploy that capacity, again, as I mentioned before, with a lot of care, where it makes sense. And even if their utilization is down for a while, we're fine with that.

Okay. Yeah, thank you. Very clear. So my second question is on connectivity. So how the lower number of flights impact the connectivity, the connection time for the passengers? Is there like a – are you mapping out the connection time, the average connection time with passengers now versus before? And also there was an increase in the maximum – number of hours that a passenger can wait in Panama from 6 to 12 hours. How does this change the demand? So was this a huge restriction before when it was settled at 6 hours? So if you could speak about that connectivity with lower capacity, it would be great as well. Thank you.

Yeah, well, the minimum hour to connect, that was lifted, so that restriction is not there any longer, so we're back to whatever we had before. And we've flown so little up to now that the priority has been just providing connections where we're flying, not worrying about how long that connectivity is. And there's so much lack of service in most of our markets that passengers will wait as long as it's needed as it needed to make their flight. So short connections are not a priority right now until we build back to something like what we had before.

Very clear, gentlemen. Thank you so much.

Thank you, Rogero.

Thank you. Our next question comes from the line of Bert Shubin with Steeple. Your line is now open.

Ed, good morning. You mentioned in your prepared remarks that you think you will come out ahead after the pandemic. What do you see as the single greatest opportunity that COPA has in a post-vaccine world?

So what we meant by coming ahead, I would summarize it in two aspects. First is what Jose mentioned a few minutes ago about lowering our search costs to a point where we could be as successful as before with much lower ASNs, which means that as we increase ASNs to a level more similar to 2019, we will do better than 2019. So that's number one, what we mean by coming out ahead, so a better cost structure. And number two is the value of the Copa Hub of the America advantage in a marketplace where a lot of markets will not be able to sustain, smaller markets won't be able to sustain a direct point-to-point service. So our hub will be even more valuable. So I would say those are the two things that we're looking at.

Okay, yeah, that's helpful. Thank you. I know this is a smaller part of your business, but have you seen any opportunity in the cargo market just as capacity has been significantly curtailed across both South and Central America, or do you sort of expect that to just come back like it was last year?

Most of our cargo is daily cargo. We don't operate freighters, although we might do ad hoc freighter chargers here and there, but we do not operate as freighter aircraft. So the opportunities in the cargo market right now are limited.

Thanks for the time.

Thank you, Greg.

Thank you. Our next question comes from the line of Dan McKenzie with Seaport Global Securities. Your line is now open.

Oh, hey, thanks. Good morning, guys. Going back to the commentary of a challenging 2021 because the region could be subject to further travel restrictions, Is that concern tied to the timing of the rollout in vaccines and key end markets? I'm wondering what you can share here. And, you know, just related to this, going back to, you know, kind of your thoughts on corporate travel, I know accounts can't share what they're doing or what they're going to do right now, and I know people want to get back in the air. But I'm just wondering, you know, what you can share about your starting assumptions as you think about planning for 2021, you know, maybe your best estimate of what it could look like.

Yes, I think it's correct to think that we're being very careful and conservative in our assumptions. We don't really know, and there's still risk out there. The vaccine news are very encouraging, but we're unsure of how long it's going to take for the vaccines to be widely available. especially in our region. So will that happen mid-2021 or towards the end of 2021? It's really hard to tell. And in the meantime, anything can happen like we've seen in the U.S. and in Europe. We've seen the second wave and the effect that it had on air traffic in the U.S. and Europe. So we're being careful and we're being conservative as we usually are. I would say that's kind of what you're seeing in the numbers we're sharing.

And keeping flexibility open. I think that, again, the other thing is flexibility, Ben. It's critical for 2021.

Understood. And I guess just related to VFR traffic, you know, what can you share about the people that are willing to travel right now? So, you know, kind of their profile or demographic. Are these, you know, primarily millennials that just don't care about the virus? And I guess, you know, kind of where I'm going with the question is I'm just wondering if you know, do we get to a place where demand plateaus at, say, 50%, you know, until vaccines are rolled out, or is the thought, as you think about 2021, you know, that the recovery, and this goes back to your response to a prior question, that it could just increase, you know, kind of at a steady clip or steady rate each month sequentially as we move forward?

You know, with 2021, you know, I would not even call it a projection, but in our 21 thinking, we're assuming that there is a plateau before the vaccines are widely available, that there will be a plateau. We just don't know at what level we're going to hit that plateau, but we are expecting it. We're planning for that. We've seen it in other parts of the world. People want to travel, and actually I'm surprised on a positive way. by what people tell me, but still, that's just a percentage. So where's that tussle? That's the big question, and that's why, again, we're being so careful.

Okay, understood. Thanks for the time, you guys. Thank you.

Thank you. Our next question comes from the line of Mike Linenberg with Deutsche Bank. Your line is now open.

Hey, good morning, everyone, Pedro, Jose. Good morning. Hey, two questions here. So, you know, as you indicated in the release, you hit 38 destinations in November, and I think, Jose, I heard you say 50 by year end. Pre-COVID, I think you were at 80 destinations, and the reason I'm sort of bringing this up is that, you know, you made this decision a year ago to get out of your 100-seaters and your 124-seaters, so if your small shell is about 160 seats or so, plus or minus a few, when we look at You know, when that decision was made, I suspect that you probably thought that maybe a few of the cities would lose service, given the size of the gauge, or maybe it would lose frequency. Maybe it wouldn't make economic sense. With COVID now and the impact that that has had on demand, has that led you as an organization to maybe reconsider operating a smaller aircraft, maybe a 737 aircraft, Dash 7 Max, for example. I realize that that goes against the grain of what you want to do from a unit cost perspective, but it would think that, you know, by getting out of these smaller shelves, that you're going to preclude yourself from serving, you know, more than just a few of the 80 cities that you served pre-COVID. Thoughts on that?

Yeah. So my first thing I'll say is that we're very happy with the way we have simplified the fleets. and how quickly we've been able to do that. We're very happy. I mean, obviously our flight operations team is even happier. The maintenance team is delighted. And our costs are going to also be better with a simplified fleet and a larger gauge. So our unit costs are happy also. The finance team is also very happy. The finance team is also – everybody is happy. As you well say, there will be some smaller markets that on paper could suffer. Our plan is one, or our pre-pandemic plan or our current plan or whatever you want to call it, is that we can adjust frequencies as needed in some smaller markets. But also usually our small markets, where we don't serve with that many frequencies are mostly leisure, and leisure can be stimulated with pricing, and a larger gauge aircraft can allow us to offer much better pricing because that's much lower cost. So we think with those things, adjusting frequencies and pricing for leisure, we can make the capacity work, and actually the financials should work better also.

All right. No, that makes sense. And then just my second question on the power by the hour agreements that you entered into, you've been very good or you've been a bit of a standout when it comes to, you know, meeting your liabilities, making your payments, not deferring aircraft rent. Up until this point, any call that at least I've been on, these power by the hour deals were ones that were initiated by the lessees who were coming from a point where, their negotiation leverage was somewhat weak and they needed some assistance. I get the sense from the conversations or what went on here is that this was from a point of strength where the lessors came to you and realized that they didn't want to have all these 737-800s coming back. And so as a company, you were able to extract something very attractive to you from an aircraft ownership perspective. Is that the right interpretation here?

Well, Mike, I would say that it was a mutual discussion, and we've been having discussions with our lessors for the last several months. And the one thing is that, yeah, I think it was a win-win in the sense that, yeah, they don't get an airplane dropped in a very difficult moment for them. And at the same time, we win by the fact that we get immediate benefits from this negotiation that we made. So I say that it was a win-win for all in all.

And Mike, Pedro here, our lead sources are probably bullish here. and feel that, you know, much better than having those tanks parked with no client, is having Alpa continue taking good care of the train and probably bullish in the sense that maybe the recovery in their mind will come sooner and those hours are going to be thrown and paid for. So it's a win-win, Jose's mentioning.

That's great. Can I just, one quick squeeze in just one more on just the Boeing thing? negotiation. And this is just from a modeling perspective as we think about your cash out over the next year or so. Some carriers have in their discussions with Boeing, we've seen some where the net result has been a future benefit as it relates to ownership cost. For others, we've seen them receive you know, one or multiple payments, you know, what they call vendor support or vendor payments in return. Is there anything that you can tell us, you know, at least from a cash modeling perspective, what we should anticipate with respect to the agreement with Boeing?

Yeah, Mike, I'm not going to get into the details of the nature of the negotiations because they're of a confidential nature. Okay. One thing is that... it is not included in our cash flow projections that we've shared with the market. And our expectation for cash consumption do not include any assumptions of anything related to point. I mean, we've been very, very keen on making sure that we project our cash consumption in a very straight way. So we're not adding sort of these extraordinary items into it.

Very helpful. Thanks, Jose. Thanks, Pedro. Thank you, Mike.

Thank you. Our last question comes from the line of Stephen Trent with Citi. Your line is now open.

Thank you very much, guys, and I appreciate the time. I just had one or two quick follow-ups, if I may. When we think about COPPA's passenger flow overlap, you know, with the likes of Avianca or Aeromexico, what sort of overlap did you guys have on a pre-pandemic basis, just thinking about your trunk route exposure?

I think with Avianca, we have the most overlap. The Bogota hub and the Panama hub have the most overlap versus others. But destinations out of Panama, were close to twice the number that are served from Bogota. So we had that advantage. But those are the two hubs that overlap the most.

Great. I appreciate that, Pedro. And just one really quick follow-up. And I know it's early days, and I know there are a whole bunch of moving parts here. But when you think about longer-term opportunities, you know, How were you thinking any differently with respect to potential M&A or with respect to, you know, down the line setting up that joint business agreement with United Airlines? Just sort of wanted to, you know, take your temperature on those opportunities, if I may.

Yeah, I mean, the joint business agreement, it was never filed, but, you know, It's still a possibility, of course. It hasn't been ended either. But as we know, Avianca is in a Chapter 11 process, so that kind of throws everything overboard. And we have to not necessarily start from scratch, but retake those conversations when they understand their future better, when the Chapter 11 proceedings are more advanced. So we expect to continue those conversations at some point, but hard to tell what's going to happen right now.

Understandable. Appreciate that, Pedro, and hope you guys all stay safe and healthy.

You too, Kevin. Thank you. Great conversation.

Thank you. This concludes today's question and answer session. I would now turn the call back to Pedro Haldon for closing remarks.

Okay, thank you all. This concludes our earnings call. Thank you for being with us. Thank you for your continued support. If we don't talk again, have a much better end of the year than what we have experienced in the last few months. And have, of course, a great day and a great weekend. So hope to see you soon. Thank you.

Ladies and gentlemen, Thank you for your participation. That concludes the presentation. You may now disconnect. Everyone have a wonderful day.